Below are interesting published articles on the global economic situations in relation to the Philippine economy. We hope these articles can be of help to lawyers as they try to assist foreign investors coming to the country.


In June 2010, it was reported that Greece was experiencing a very serious debt crisis. In May 2010 EU bailed out Greece. It extended loans payable in 5 years at interest of 5.2% per Annum.


This November 2010, EU bailed out Ireland. It agreed to give Ireland Euro 67.5 Billion in bailout loans payable in 10 years at interest of 5.7 percent per annum. Portugal may be next. Spain and Hungary were reported to be also in crisis.


EU is in crisis. Germany which is the biggest EU economy is tired of bail outs as it has experienced bailing out East Germany with great difficulty. If EU crisis worsens, then US will also suffer because 20% of US exports go to EU. And US will not let EU crisis worsens because it badly needs EU payments which US will use to pay its huge debts amounting to USD13 Trillion which is expected to be 88% of projected gross domestic product of USD14.6 Trillion by end of this year.


Surprisingly, it is observed that US dollar is fairly stable compared to other currencies. Why? US will do everything to prevent its dollar to appreciate much otherwise its exports will not be competitive. It cannot allow also its dollar to depreciate much because China holds much of these dollars and China can retaliate to hurt US.


With China awash with cash and exporting cheap products worldwide, is it not the greatest creditor at present. How can economic balance be maintained?


Meantime we read first about the Irish crisis and how EU bails it out.




30 NOVEMBER 2010-11-30


BRUSSELS – European Union nations agreed to give eauro67.5 billion ($89.4 billion) in bailout loans to Ireland on Sunday to help it weather the cost of its massive banking crisis, and sketched out new rules for future emergencies in an effort to restore faith in the euro currency.


          The rescue deal, approved by finance ministers at an emergency meeting in Brussels, means two of the eurozone’s 16 nations have now come to depend on foreign help and underscores Europe’s struggle to contain its spreading debt crisis. The fear is that with Greece and now Ireland shored up, speculative traders will target the bloc’s other weak fiscal links, particularly Portugal.


          In Dublin, Irish Prime Minister Brian Cowen said his country will take euro 10 billion immediately to boost the capital reserves of its state-backed banks, whose bad loans were picked up by the Irish government but have become too much to handle. Another euro25 billion will remain in reserve, earmarked for the banks.


          The rest of loans will be used to cover Ireland’s deficits for the coming four years. EU Chiefs also gave Ireland an extra year, until 2015, to reduce its annual deficits to 3 percent of GDP, the eurozone limit. The deficit now stands at a modern European record of 32 percent because of the runaway costs of its bank bailout program.


          Cowen said the accord reached after two weeks of tense negotiations in Brussels and Dublin to fathom the true depth of the country’s cash crisis “provides Ireland with vital time and space to successfully and conclusively address the unprecedented problems that we’ve been dealing with since this global economic crisis began.”


          However, in a surprise accounting move, European and IMF experts decided that Ireland first must run down its own cash stockpile and deploy its previously off-limits pension reserves in the bailout. Until now, Irish and EU law had made it illegal for Ireland to use its pension fund to cover current expenditures. This move means Ireland will contribute euro17.5 billion to its own salvation.


          The three groups offering funds to Ireland-the 16-nation eurozone, the full 27-nation EU, and the global donors of the International Monetary Fund-each have committed euro22.5 billion ($29.8 billion). Extra bilateral loans from Sweden, Denmark and Britain are included within the EU contribution totals.


          Ireland’s finance ministry said the interest rates on the loans would be 6.05 percent from the eurozone fund, 5.7 percent from the EU fund and 5.7 percent from the IMF. That’s higher than the 5.2 percent being paid by Greece for its own May bailout.


          Ajai Chopra, deputy director of the IMF’s European division who oversaw the Dublin negotiations, confirmed Ireland’s government would have freedom to set its own spending and tax plans.


          He said Ireland will have 10 years to pay off its IMF loans, and that the first repayment won’t be required until four-and-a-half years after a drawdown. Greece, in contrast, has three years to repay its loans.


According to the World Bank, recovery from the global financial crises is happening but sluggish due to the economic crisis in Europe caused by the Greek debt crisis. The hope for global economic growth lies with the developing countries. Read below the World Bank’s views as of June 2010.

Then, know about the Greek Debt Crisis in the following Article 0006. Greece is not the only European country facing debt problems. Spain, Portugal and Hungary are experiencing huge debt problems which may attain crisis level also.


AS OF:   JUNE 2010

Global Economic Prospects

Key messages
The global recovery is moving into a more mature phase led by growing domestic demand.

  • However, conditions in Europe may derail the recovery.
  • A more rapid adjustment of fiscal policy would be better for developing countries.
  • A decline in aid flows could have serious consequences for the poorest countries.
  •  More… 

Global outlook summary table
A table summarizing the forecast. More detailed information is available here.

Debt crisis
So far, the uncertainty about the sustainability of fiscal positions in several high-income European countries (EU-5)  has had limited impacts on developing countries. While stock markets have declined, spreads and credit default swaps for most countries have remained stable. So far industrial production and trade continue to expand rapidly. More…

Financial markets
Financial markets have recovered from their lows in 2009, but conditions remain tight and banks may be exposed to debt in EU-5 countries. Bond issuance declined sharply in May. International capital flows to developing countries are projected to reach about 3.5 percent of their GDP in 2012, up from 2.5 percent in 2009.  See also the topical annex on Financial market developments. More…

Medium-term prospects
Growth prospects are very uncertain because of the situation in Europe. Nevertheless, developing countries are projected to lead the recovery with growth rates around 6 percent. High-income countries growth will accelerate from about 2-2.3 percent in 2010 to between 2.3 and 2,7 percent in 2012.
Regional annexes touch on prospects in:


Risks and policy impacts
Should the crisis in Europe worsen, global growth could be, lower by between as much as 0.7 percentage points and in the case of a crisis, a double-dip recession in high-income countries may not be avoided. An aggressive fiscal consolidation response would prove to be win-win for both high-income and developing countries. Long-term growth and poverty reduction in low-income countries could be affected if bilateral aid flows fall as they have during previous recessions. More…

Concluding remarks
Policy in high-income countries should focus on reducing the uncertainty surrounding the Greek debt issue. Growth in developing (and high-income) countries would benefit from a more rapid consolidation. Poverty reduction in low-income countries could be impeded if aid flows are cut and countries are forced to cut back on infrastructure and human capital investment. More…



What is this Greek Debt Crisis?

Why the Greek Debt Crisis Matters


June 07, 2010

// The big economic news still rattling world markets is that Standard and Poor’s downgraded Greece’s debt to junk status, which will make it very difficult for Greece to borrow money.

Some economists say that Greece has entered an economic death spiral and that it is only a matter of time before officials declare insolvency.

Greece is just the tip of the iceberg, or the canary in the coal mine, for the broader sovereign debt problems around the world. 

The number of nations with deep debt problems is extensive, as I wrote about recently.

The Greek debt issue has become a European issue, and sooner or later could become a global issue. 

As Harvard economist Kenneth Rogoff noted, “This is a very, very delicate situation that could spin out of control.” 

An eventual Greek default could spark a rapidly spreading contagion, which may have already begun. Portugal and Spain were both downgraded recently. And last week, a leading Hungarian official said his nation faces a Greek-like sovereign-debt problem.

Though the EU has promised bailout money to Greece, it does not want to establish a precedent for bailing out the likes of Portugal, Spain, Italy, Ireland and Iceland, other European nations with burdensome debts.

The debt crisis could spread rapidly if Greece does indeed default. It was just two months ago that the $40 billion EU bailout plan was announced, with the IMF promising additional billions in funding. Greek officials declared victory, saying that they didn’t actually need the bailout funds, but that their availability would reassure investors and allow them to continue to borrow on the world markets.

But in the short interim, Greece’s fortunes seem to have gone up in flames. This shows how quickly debt problems can become crises, and how quickly crises can become cataclysms.

The Greek bailout is not popular with German voters, who made their feelings known at the polls last month. As Europe’s largest economy, Germany would shoulder the largest proportion of any bailout. This became a political issue and Chancellor Angela Merkel’s Christian-Democrats took a beating in the election.

Having absorbed the much poorer East Germany over the past two decades, Germans are leery about bailing out entire nations. German taxpayers are still paying for the huge expense of national integration.

The falling euro is a mixed blessing for the dollar, which should also be falling due to high budget deficits and long term US debt problems. The national debt has now reached $13 trillion and is expected to be of 88% of the $14.6 trillion US gross domestic product by year’s end.

As bad as the dollar’s problems are, relative to other prominent world currencies, it appears stable. You could say the dollar is the worst currency in the world – aside from all the others. That’s how bad the global debt problem is.

However, a strengthening dollar will hurt US exports, and since Western Europe receives 20% of US exports, an ongoing financial crisis there will also hurt the US economy.

Greek citizens are taking action in the face of the crisis. In the past few months, they have begun moving their money across the borders to safer havens. Some 10 Billion Euros worth of cash and assets have made the exodus to escape a potential collapse. 

Some economists think that Greece may have no choice but to leave the euro, and despite all the repercussions that would ensue, the rest of the 16-nation Euro Zone may gladly let it.

Yet that could be a cataclysmic moment for the relatively nascent currency.

As billionaire investor George Soros noted, “The consequences of Greece leaving the euro would be the disintegration of the euro. The disintegration of the euro would take [us] a very long way toward the disintegration of the European Union.”

That’s the ugly possibility European officials are grappling with right now.


We are always affected by the change in the price of gasoline or diesel. Here is the global history on the price of oil. Read the full article and other articles in





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Oil Price History and Analysis
A discussion of crude oil prices, the relationship between prices and rig count and the outlook for the future of the petroleum industry.  
IntroductionCrude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply.The U.S. petroleum industry’s price was heavily regulated through production or price controls throughout much of the twentieth century. In the post World War II era U.S. oil prices at the wellhead averaged $26.64 per barrel adjusted for inflation to 2008 dollars. In the absence of price controls, the U.S. price would have tracked the world price averaging $28.68. Over the same post war period the median for the domestic and the adjusted world price of crude oil was $19.60 in 2008 prices. That means that only fifty percent of the time from 1947 to 2008 have oil prices exceeded $19.60 per barrel.  (See note in box on right.)Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude, oil prices only exceeded $24.00 per barrel in response to war or conflict in the Middle East. With limited spare production capacity, OPEC abandoned its price band in 2005 and was powerless to stem the surge in oil prices, which was reminiscent of the late 1970s.
Crude Oil Prices 1947 – August, 2009

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*World Price – The only very long term price series that exists is the U.S. average wellhead or first purchase price of crude. When discussing long-term price behavior this presents a problem since the U.S.  imposed price controls on domestic production from late 1973 to January 1981. In order to present a consistent series and also reflect the difference between international prices and U.S. prices we created a world oil price series that was consistent with the U.S. wellhead price adjusting the wellhead price by adding the difference between the refiners acquisition price of imported crude and the refiners average acquisition price of domestic crude. 


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The Very Long Term ViewThe very long-term view is much the same.  Since 1869, US crude oil prices adjusted for inflation have averaged $22.52 per barrel in 2008 dollars compared to $23.42 for world oil prices.Fifty percent of the time prices U.S. and world prices were below the median oil price of $16.71 per barrel.If long-term history is a guide, those in the upstream segment of the crude oil industry should structure their business to be able to operate with a profit, below $17.65 per barrel half of the time. The very long-term data and the post World War II data suggest a “normal” price far below the current price. 

Crude Oil Prices 1869-2009

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The results are dramatically different if only post-1970 data are used. In that case, U.S. crude oil prices average $32.36 per barrel and the more relevant world oil price averages $35.50 per barrel. The median oil price for that period is $30.04 per barrel.If oil prices revert to the mean this period is likely the most appropriate for today’s analyst. It follows the peak in U.S. oil production eliminating the effects of the Texas Railroad Commission and is a period when the Seven Sisters were no longer able to dominate oil production and prices. It is an era of far more influence by OPEC oil producers than they had in the past. As we will see in the details below influence over oil prices is not equivalent to control. Crude Oil Prices 1970-2008Click on graph for larger view
Post World War IIPre Embargo PeriodCrude Oil prices ranged between $2.50 and $3.00 from 1948 through the end of the 1960s. The price oil rose from $2.50 in 1948 to about $3.00 in 1957. When viewed in 2008 dollars an entirely different story emerges with crude oil prices fluctuating between $17 and $19 during most of the period.  The apparent 20% price increase in nominal prices just kept up with inflation. From 1958 to 1970, prices were stable near $3.00 per barrel, but in real terms the price of crude oil declined from above $19 to $14 per barrel.  The decline in the price of crude when adjusted for inflation for the international producer suffered the additional effect in 1971 and 1972 of a weaker US dollar. Established in 1960 OPEC, with five founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, took over a decade to establish its influence in the world market.  Two of the representatives at the initial meetings had studied the the Texas Railroad Commission’s methods of influencing price through limitations on production. By the end of 1971, six other nations had joined the group: Qatar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria.  From the foundation of the Organization of Petroleum Exporting Countries through 1972 member countries experienced steady decline in the purchasing power of a barrel of oil.

Throughout the post war period exporting countries found increasing demand for their crude oil but a 40% decline in the purchasing power of a barrel of oil.  In March 1971, the balance of power shifted.  That month the Texas Railroad Commission set proration at 100 percent for the first time.  This meant that Texas producers were no longer limited in the volume of oil that they could produce.  More importantly, it meant that the power to control crude oil prices shifted from the United States (Texas, Oklahoma and Louisiana) to OPEC.  Another way to say it is that there was no more spare capacity in the U.S. and therefore no tool to put an upper limit on prices. A little over two years later OPEC, through the unintended consequence of war, obtained a glimpse of the extent of its power to influence prices.

World Events and Crude Oil Prices 1947-1973

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Middle East, OPEC and Oil Prices 1947-1973

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Middle East Supply InterruptionsYom Kippur War Arab Oil EmbargoIn 1972, the price of crude oil was about $3.00 per barrel.  By the end of 1974, the price of oil had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel by Syria and Egypt on October 5, 1973. The United States and many countries in the western world showed support for Israel. Because of this support, several Arab exporting nations and Iran imposed an embargo on the countries supporting Israel. While these nations curtailed production by 5 million barrels per day other countries were able to increase production by a million barrels. The net loss of 4 million barrels per day extended through March of 1974 and represented 7 percent of the free world production. Any doubt the ability to control crude oil prices had passed from the United States to OPEC was removed during the Arab Oil Embargo.  The extreme sensitivity of prices to supply shortages became all too apparent when prices increased 400 percent in six short months. From 1974 to 1978, the world crude oil price was relatively flat ranging from $12.21 per barrel to $13.55 per barrel.  When adjusted for inflation world oil prices were in a period of moderate decline. U.S. and World Events and Oil Prices 1973-1981

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OPEC Oil Production 1973-2009

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Crises in Iran and IraqIn 1979 and 1980, events in Iran and Iraq led to another round of crude oil price increases. The Iranian revolution resulted in the loss of 2 to 2.5 million barrels per day of oil production between November 1978 and June 1979.  At one point production almost halted.The Iranian revolution was the proximate cause of what would become the highest price in post-WWII history.  However, its impact on prices would have been limited and of relatively short duration had it not been for subsequent events. Shortly after the revolution, production was up to 4 million barrels per day.In September 1980, Iran already weakened by the revolution was invaded by Iraq. By November, the combined production of both countries was only a million barrels per day and 6.5 million barrels per day less than a year before. Consequently worldwide crude oil production was 10 percent lower than in 1979.The combination of the Iranian revolution and the Iraq-Iran War cause crude oil prices to more than double increasing from $14 in 1978 to $35 per barrel in 1981.

Three decades later Iran’s production is only two-thirds of the level reached under the government of Reza Pahlavi, the former Shah of Iran.

Iraq’s production remains a million barrels below its peak before the Iraq-Iran War.

Iran Oil production 1973-2009Click on graph for larger viewIraq Oil production 1973-2009

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US Oil Price Controls – Bad Policy?The rapid increase in crude prices from 1973 to 1981 would have been much less were it not for United States energy policy during the post Embargo period. The US imposed price controls on domestically produced oil.  The obvious result of the price controls was that U.S. consumers of crude oil paid about 50 percent more for imports than domestic production and U.S producers received less than world market price. In effect, the domestic petroleum industry was subsidizing the U.S. consumer.
Did the policy achieve its goal? In the short-term, the recession induced by the 1973-1974 crude oil price spike was somewhat less severe because U.S. consumers faced lower prices than the rest of the world.  However, it had other effects as well. In the absence of price controls, U.S. exploration and production would certainly have been significantly greater. Higher petroleum prices faced by consumers would have resulted in lower rates of consumption: automobiles would have achieved higher miles per gallon sooner, homes and commercial buildings would have has better insulated and improvements in industrial energy efficiency would have been greater than they were during this period. Consequently, the United States would have been less dependent on imports in 1979-1980 and the price increase in response to Iranian and Iraqi supply interruptions would have been significantly less.
US Oil Price Controls 1973-1981

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OPEC Fails to Control Crude Oil Prices    
OPEC has seldom been effective at controlling prices. While often referred to as a cartel, OPEC does not satisfy the definition. One of the primary requirements is a mechanism to enforce member quotas. The old joke went something like this. What is the difference between OPEC and the Texas Railroad Commission? OPEC doesn’t have any Texas Rangers! The only enforcement mechanism that has ever existed in OPEC was Saudi spare capacity.With enough spare capacity at times to be able to increase production sufficiently to offset the impact of lower prices on its own revenue, Saudi Arabia could enforce discipline by threatening to increase production enough to crash prices. In reality even this was not an OPEC enforcement mechanism unless OPEC’s goals coincided with those of Saudi Arabia.During the 1979-1980 period of rapidly increasing prices, Saudi Arabia’s oil minister Ahmed Yamani repeatedly warned other members of OPEC that high prices would lead to a reduction in demand. His warnings fell on deaf ears. Surging prices caused several reactions among consumers: better insulation in new homes, increased insulation in many older homes, more energy efficiency in industrial processes, and automobiles with higher efficiency. These factors along with a global recession caused a reduction in demand which led to falling crude prices.  Unfortunately for OPEC only the global recession was temporary. Nobody rushed to remove insulation from their homes or to replace energy efficient plants and equipment — much of the reaction to the oil price increase of the end of the decade was permanent and would never respond to lower prices with increased consumption of oil. 

Higher prices also resulted in increased exploration and production outside of OPEC. From 1980 to 1986 non-OPEC production increased 10 million barrels per day. OPEC was faced with lower demand and higher supply from outside the organization.

From 1982 to 1985, OPEC attempted to set production quotas low enough to stabilize prices. These attempts met with repeated failure as various members of OPEC  produced beyond their quotas. During most of this period Saudi Arabia acted as the swing producer cutting its production in an attempt to stem the free fall in prices. In August of 1985, the Saudis tired of this role.  They linked their oil price to the spot market for crude and by early 1986 increased production from 2 MMBPD to 5 MMBPD.  Crude oil prices plummeted below $10 per barrel by mid-1986. Despite the fall in prices Saudi revenue remained about the same with higher volumes compensating for lower prices.

A December 1986 OPEC price accord set to target $18 per barrel bit it was already breaking down by January of 1987and prices remained weak.

The price of crude oil spiked in 1990 with the lower production and uncertainty associated with the Iraqi invasion of Kuwait and the ensuing Gulf War. The world and particularly the Middle East had a much harsher view of Saddam Hussein invading Arab Kuwait than they did Persian Iran. The proximity to the world’s largest oil producer helped to shape the reaction.

Following what became known as the Gulf War to liberate Kuwait crude oil prices entered a period of steady decline until in 1994 inflation adjusted prices attained their lowest level since 1973.

The price cycle then turned up. The United States economy was strong and the Asian Pacific region was booming. From 1990 to 1997 world oil consumption increased 6.2 million barrels per day. Asian consumption accounted for all but 300,000 barrels per day of that gain and contributed to a price recovery that extended into 1997. Declining Russian production contributed to the price recovery. Between 1990 and 1996 Russian production declined over 5 million barrels per day.

World Events and Crude Oil Prices 1981-1998

Click on graph for larger viewU.S. Petroleum Consumption

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Non-OPEC Production & Crude Oil Prices

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OPEC Production & Crude Oil Prices

Click on graph for larger viewRussian Crude Oil Production
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OPEC continued to have mixed success in controlling prices. There were mistakes in timing of quota changes as well as the usual problems in maintaining production discipline among its member countries.The price increases came to a rapid end in 1997 and 1998 when the impact of the economic crisis in Asia was either ignored or severely underestimated by OPEC.  In December, 1997 OPEC increased its quota by 2.5 million barrels per day (10 percent) to 27.5 MMBPD effective January 1, 1998. The rapid growth in Asian economies had come to a halt. In 1998 Asian Pacific oil consumption declined for the first time since 1982. The combination of lower consumption and higher OPEC production sent prices into a downward spiral.   In response, OPEC cut quotas by 1.25 million b/d in April and another 1.335 million in July. Price continued down through December 1998.Prices began to recover in early 1999 and OPEC reduced production another 1.719 million barrels in April. As usual not all of the quotas were observed but between early 1998 and the middle of 1999 OPEC production dropped by about 3 million barrels per day and was sufficient to move prices above $25 per barrel.With minimal Y2K problems and growing US and world economies the price continued to rise throughout 2000 to a post 1981 high. Between April and October, 2000 three successive OPEC quota increases totaling 3.2 million barrels per day were not able to stem the price increases. Prices finally started down following another quota increase of 500,000 effective November 1, 2000.
World Events and Crude Oil Prices 1997-2003Click on graph for larger viewOPEC Production 1990-2007

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Russian production increases dominated non-OPEC production growth from 2000 forward and was responsible for most of the non-OPEC increase since the turn of the century. Once again it appeared that OPEC overshot the mark. In 2001, a weakened US economy and increases in non-OPEC production put downward pressure on prices.  In response OPEC once again entered into a series of reductions in member quotas cutting 3.5 million barrels by September 1, 2001. In the absence of the September 11, 2001 terrorist attack this would have been sufficient to moderate or even reverse the trend.In the wake of the attack crude oil prices plummeted. Spot prices for the U.S. benchmark West Texas Intermediate were down 35 percent by the middle of November. Under normal circumstances a drop in price of this magnitude would have resulted an another round of quota reductions but given the political climate OPEC delayed additional cuts until January 2002. It then reduced its quota by 1.5 million barrels per day and was joined by several non-OPEC producers including Russia who promised combined production cuts of an additional 462,500 barrels. This had the desired effect with oil prices moving into the $25 range by March, 2002. By mid-year the non-OPEC members were restoring their production cuts but prices continued to rise and U.S. inventories reached a 20-year low later in the year. By year end oversupply was not a problem. Problems in Venezuela led to a strike at PDVSA causing Venezuelan production to plummet. In the wake of the strike Venezuela was never able to restore capacity to its previous level and is still about 900,000 barrels per day below its peak capacity of 3.5 million barrels per day.  OPEC increased quotas by 2.8 million barrels per day in January and February, 2003. On March 19, 2003, just as some Venezuelan production was beginning to return, military action commenced in Iraq. Meanwhile, inventories remained low in the U.S. and other OECD countries. With an improving economy U.S. demand was increasing and Asian demand for crude oil was growing at a rapid pace.

The loss of production capacity in Iraq and Venezuela combined with increased OPEC production to meet growing international demand led to the erosion of excess oil production capacity. In mid 2002, there was over 6 million barrels per day of excess production capacity and by mid-2003 the excess was below 2 million. During much of 2004 and 2005 the spare capacity to produce oil was under a million barrels per day. A million barrels per day is not enough spare capacity to cover an interruption of supply from most OPEC producers.

In a world that consumes over 80 million barrels per day of petroleum products that added a significant risk premium to crude oil price and is largely responsible for prices in excess of $40-$50 per barrel.

Other major factors contributing to the current level of prices include a weak dollar and the continued rapid growth in Asian economies and their petroleum consumption.  The 2005 hurricanes and U.S. refinery problems associated with the conversion from MTBE as an additive to ethanol have contributed to higher prices.

World Events and Crude Oil Prices 2001-2007Click on graph for larger viewRussian Crude Oil Production

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Venezuelan Oil Production

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Excess Crude Oil Production Capacity

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One of the most important factors supporting a high price is the level of petroleum inventories in the U.S. and other consuming countries. Until spare capacity became an issue inventory levels provided an excellent tool for short-term price forecasts. Although not well publicized OPEC has for several years depended on a policy that amounts to world inventory management. Its primary reason for cutting back on production in November, 2006 and again in February, 2007 was concern about growing OECD inventories. Their focus is on total petroleum inventories including crude oil and petroleum products, which are a better indicator of prices that oil inventories alone.  
Impact of Prices on Industry SegmentsDrilling and Exploration    
Boom and BustThe Rotary Rig Count is the average number of drilling rigs actively exploring for oil and gas. Drilling an oil or gas well is a capital investment in the expectation of returns from the production and sale of crude oil or natural gas. Rig count is one of the primary measures of the health of the exploration segment of the oil and gas industry.  In a very real sense it is a measure of the oil and gas industry’s confidence in its own future. At  the end of the Arab Oil Embargo in 1974 rig count was below 1500. It rose steadily with regulated crude oil prices to over 2000 in 1979.  From 1978 to the beginning of 1981 domestic crude oil prices exploded from a combination of the the rapid growth in world energy prices and deregulation of domestic prices. At that time high prices and forecasts of crude oil prices in excess of $100 per barrel fueled a drilling frenzy. By 1982 the number of rotary rigs running had more than doubled. It is important to note that the peak in drilling occurred over a year after oil prices had entered a steep decline which continued until the 1986 price collapse. The one year lag between crude prices and rig count disappeared in the 1986 price collapse. For the next few years the economy of the towns and cities in the oil patch was characterized by bankruptcy, bank failures and high unemployment. U.S. Rotary Rig Count 1974-2005
Crude Oil and Natural Gas Drilling

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After the CollapseSeveral trends established were established in the wake of the collapse in crude prices. The lag of over a year for drilling to respond to crude prices is now reduced to a matter of months. (Note that the graph on the right is limited to rigs involved in exploration for crude oil as compared to the previous graph which also included rigs involved in gas exploration.) Like any other industry that goes through hard times the oil business emerged smarter, leaner and more conservative. Industry participants, bankers and investors were far more aware of the risk of price movements. Companies long familiar with accessing geologic, production and management risk added price risk to their decision criteria. Technological improvements were incorporated: 

  • Increased use of 3-D seismic data reduced drilling risk.
  • Directional and horizontal drilling led to improved production in many reservoirs.
  • Financial instruments were used to limit exposure to price movements.
  • Increased use of CO2 floods and improved recovery methods to improve production in existing wells.

In spite of all of these efforts the percentage of rigs employed in drilling for crude oil decreased from over 60 percent of total rigs at the beginning of 1988 to under 15 percent until a recent resurgence. 

U.S. Rotary Rig Count
Exploration for Oil

Click on graph for larger viewU.S. Rotary Rig Count
Percent Exploring for Crude Oil

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Well Completions – A measure of success?Rig count does not tell the whole story of oil and gas exploration and development. It is certainly a good measure of activity, but it is not a measure of success. After a well is drilled it is either classified as an oil well, natural gas well or dry hole. The percentage of wells completed as oil or gas wells is frequently used as a measure of success.  In fact, this percentage is often referred to as the success rate.  Immediately after World War II 65 percent of the wells drilled were completed as oil or gas wells. This percentage declined to about 57 percent by the end of the 1960s. It rose steadily during the 1970s to reach 70 percent at the end of that decade. This was followed by a plateau or modest decline through most of the 1980s. Beginning in 1990 shortly after the harsh lessons of the price collapse completion rates increased dramatically to 77 percent. What was the reason for the dramatic increase? For that matter, what was the cause of the steady drop in the 1950s and 1960s or the reversal in the 1970s? 

Since the percentage completion rates are much lower for the more risky exploratory wells, a shift in emphasis away from development would result in lower overall completion rates. This, however, was not the case. An examination of completion rates for development and exploratory wells shows the same general pattern. The decline was price related as we will explain later. 

Some would argue that the periods of decline were a result of the fact that every year there is less oil to find.  If the industry does not develop better technology and expertise every year, oil and gas completion rates should decline. However, this does will not explain the periods of increase. 

The increases of the seventies were more related to price than technology. When a well is drilled, the fact that oil or gas is found does not mean that the well will be completed as a producing well.  The determining factor is economics. If the well can produce enough oil or gas to cover the additional cost of completion and the ongoing production costs it will be put into production.  Otherwise, its a dry hole even if crude oil or natural gas is found.  The conclusion is that if real prices are increasing we can expect a higher percentage of successful wells. Conversely if prices are declining the opposite is true. 

The increases of the 1990s, however, cannot be explained by higher prices. These increases are the result of improved technology and the shift to a higher percentage of natural gas drilling activity. The increased use of and improvements to 3-D seismic data and analysis combined with horizontal and and directional drilling improve prospects for successful completions. The fact that natural gas is easier to see in the seismic data adds to that success rate.

Most dramatic is the improvement in the the percentage exploratory wells completed. In the 1990s completion rates for exploratory wells have soared from 25 to 45 percent. 

Oil and Gas Well Completion Rates
Click on graph for larger viewOil and Gas Well Completion Rates
Click on graph for larger viewOil and Gas Well Completion Rates

Click on graph for larger viewU.S. Oil and Gas Well Completion Rates

Click on graph for larger view 

Workover Rigs – MaintenanceWorkover rig count is a measure of the industry’s investment in the maintenance of oil and gas wells.  The Baker-Hughes workover rig count includes rigs involved in pulling production tubing, sucker rods and pumps from a well that is 1,500 feet or more in depth.Workover rig count is another measure of the health of the oil and gas industry. A disproportionate percentage of workovers are associated with oil wells. Workover rigs are used to pull tubing for repair or replacement of rods, pumps and tubular goods which are subject to wear and corrosion. A low level of workover activity is particularly worrisome because it is indicative of deferred maintenance.  The situation is similar to the aging apartment building that no longer justifies major renovations and is milked as long as it produces a positive cash flow. When operators are in a weak cash position workovers are delayed as long as possible. Workover activity impacts manufacturers of  tubing, rods and pumps. Service companies coating pipe and other tubular goods are heavily affected.  U.S. Workover Rigs and Crude Oil Prices
Click on graph for larger view


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The US dollar payments you receive from foreign  clients bring you less and less Philippine pesos. Bakit kaya? Countries are in a currency war. China is the cause. Read the explanation of Dr. Cielito Habito in




05 OCTOBER 2010

WONDER WHY the peso-dollar exchange rate keeps going down? It has broken into the P43 peso range, and could continue getting lower. If you are happy with that, then you probably buy a lot of imported goods, or travel abroad a lot, or invest a lot overseas. But if you work in an export or tourism-oriented business, maintain a foreign currency account, or depend on a family member’s remittances from abroad, you must be quite unhappy with what’s going on. If you’re working for a firm that doesn’t export but produces goods for domestic consumption, you may not be feeling it directly-yet. But trust me, you are bound to get hit as well, as competing imports get cheaper and price your own product out of the market.

The international economic news is lately dominated by the ongoing international currency war, as first publicly lamented last week by Brazil’s finance minister, Guido Mantega. Before him, nobody seemed to want to use the “W” word publicly. Economists have a more technical term for it, calling it “competitive depreciation,” and have been warning against it since the global economic crisis began two years ago. Simply put, central banks all over the world are taking measures to deliberately make their currencies cheaper. Translation: they are moving to make their domestic-foreign exchange rates go higher. But as they do so, they induce a chain reaction among central banks, putting them on a treadmill that makes it difficult for them to stop.

How exactly do the central banks do it? We don’t have to look far: our own Bangko Sentral ng Pilipinas (BSP has also been forced to do it lately. It has been buying up from the open market large amounts of foreign currency, especially dollars, to try to drive up its price (or what is the same thing, drive the peso value down). This also means that it releases lot of pesos-i.e., those it uses to buy dollars-into the system. With the law of supply and demand, the price of dollars goes up as the BSP itself has added t the demand for it. Equivalently, the value of the peso goes down, because the BSP has increased the supply of it in the market. At the extreme, a central bank may actually decide to fix the exchange rate at a lower level regardless of market forces. But at this day and age, few would defy the law of supply and demand, and would much rather just influence one or the other.

So if the BSP has been doing this, why has the peso-dollar exchange rate still moved down? This is where the currency war comes in and complicates matters. In economic briefings I had given in past months, I suggested that the exchange rate would not move dramatically from the P45-46 range we were seeing some months back. This was because the pressures that tend to weaken the peso, like oil and commodity price increases and high government deficits, offset the pressures that tend to strengthen the peso, especially the continued weakening of the US dollar. What I did not factor in then was the likelihood of a currency war, as is transpiring now. Closer to home, the central banks of Japan, South Korea and Taiwan recently moved to make their currencies cheaper. Central banks elsewhere are doing the same. But with that, countries will only find themselves exactly in the same place before they began intervening to cheapen their currency. And the pressure to intervene will continue, inducing a continuous race to the bottom.

Key to all of this is China, which for years has been accused by the US of manipulating the yuan to keep its value artificially low. With China exporting so much more to the US (and the rest of the world) than it imports from them over the years, the value of the Chinese currency should be much higher than it has been-as much as 20 percent higher, according to estimates. But China is accused of effectively taxing its imports and subsidizing its exports through this cheap yuan policy. China does this by buying and accumulating large amounts of US dollars in cash and government bonds; it now has more than $2.4 trillion in dollar reserves. What the US wants is for China to unload those dollar holdings, thereby buying back yuan, which will raise the demand for it and thus raise its value.

To put pressure on the Chinese, the US Congress passed legislation last week that would put heavy tariffs on American imports from China. But others fear that this will only push the Chinese to hit back by putting similar stiff restrictions on American goods and investments entering China. And Judging from China’s statements and actuations in recent years, any significant move to let their currency rise substantially in value is not in the offing. And so, the Chinese currency continues to be deliberately kept weak, while its major trading partners like the US, Japan and Europe are driven to defensively do the same.

So where do all of the investible funds go to take refuge? To countries like the Philippines and its neighbors whose currencies get stronger when the major economies’ currencies get weaker, of course. And as all the hot money surges in, the peso gets even stronger.

Of course, if you were a government official who didn’t know better, you would be happily and proudly taking credit for our “strong peso,” claiming that it is proof that our economy is being managed well (we saw a lot of those in the past administration). Our Bangko Sentral, of course, knows better.







Source: Associated Press, updated 12-02-2009

UNITED NATIONS — The United Nations forecast Wednesday that the world economy will bounce back in 2010 with a global growth rate of 2.4 percent, but it warned that the recovery will be fragile.

In a preview of its annual economic forecast which will be released next month, the U.N. credited the massive fiscal stimulus measures by governments worldwide since late 2008 for the expected rebound. It recommended that these stimulus measures continue — at least until there are clearer signals of a more robust recovery in terms of increasing consumption, more private investment and rising employment rates around the world.

“Before that, it would be risky and even could be self-defeating to withdraw stimulus,” said Rob Vos, director of the Economic Analysis Division in the U.N.’s Department of Economic and Social Affairs.

The U.N. report said an increasing number of economies showed positive growth in the second quarter of 2009, with the recovery continuing in the third quarter. It pointed to increased industrial production, a rebound in global equity markets, and a rise in international trade.

“This is an important turnaround after the free fall in world trade, industrial production, asset prices, and global credit availability which threatened to push the global economy into the abyss of a new Great Depression in early 2009,” the U.N. report said.

But the report, The World Economic Situation and Prospects 2010, warned that “the recovery is uneven and conditions for sustained growth remain fragile.”

Assistant Secretary-General Jomo Sundaram told a news conference launching the report that while “there have been important signs of some recovery … there are also very grave concerns about the possibility that this recovery will be short-lived and will not be sustained.”

The report said the failure to address two risks could cause the global economy to enter into a double-dip recession.

The first is the risk of prematurely abandoning financial stimulus measures and the second is the risk of a widening U.S. deficit and mounting external debt which could cause “a hard landing” for the U.S. dollar and set off a new wave of financial instability, it said.

Sundaram said the U.N. believes that governments should ignore concerns about growing fiscal deficits and possible inflation and continue stimulus efforts until the economic recovery is assured.

He said it was also extremely important that earlier U.N. concerns are addressed quickly including “the inadequacy of international coordination of the recovery efforts” and “the inadequacy” of efforts to reform the economic system to prevent another global financial meltdown. Reform efforts so far “have been rather limited,” he said.

While the global economy has grown in the second and third quarters of 2009, the report said “because of the steep downturn in the beginning of the year, world gross product is estimated to fall by 2.2 percent for the year (2009).”

According to the report, economic growth next year will be strongest in developing countries, especially in Asia.

It predicts growth in developing nations will increase from 1.9 percent in 2009 to 5.3 percent in 2010, with China’s economy expected to grow by 8.8 percent in 2010 and India’s by 6.5 percent, both below their pre-crisis pace.

Russia is expected to lead the turnaround among economies in transition, with 1.5 percent growth in 2010 following a severe drop of 7 percent this year, the report said.

In the industrialized world, the U.S. economy is forecast to grow by 2.1 percent in 2010 following an estimated decline of 2.5 percent in 2009, the U.N. said.

Recovery in Japan and the 16 European Union countries that use the euro currency will be much weaker — below 1 percent — next year, it said.

The world’s poorest countries will see their robust growth before the financial meltdown slow significantly, the U.N. said.

The report said 107 of the 160 nations for which data are available registered a decline in per capita income this year, including most developed countries and about 60 developing countries.

In 2010, the U.N. predicted that only 10 developing countries will see their per capita income decline. But at the same time, only 21 are expected to achieve economic growth rates of 3 percent or more, the minimum needed to ensure substantial poverty reduction, it said.

The report is produced at the beginning of every year by the U.N. Department of Economic and Social Affairs, the U.N. Conference on Trade and Development, and the five U.N. regional commissions.




Financial Times

Business World

28 October 2010

AN AMBULANCE stops by the roadside to help a man suffering from a heart attack. After desperate measures, the patient survives. Brought into hospital, he then makes a protracted and partial recovery. Then, two years later far from feeling grateful, he sues the paramedics and doctors. If it were not for their interference, he insists, he would be as good as new. As for the heart attack, it was a minor event. He would have been far better off if he had been left alone.

          That is the situation in which Dr. Barack Obama finds himself. A large part of the American public has long since forgotten the gravity of the financial heart attack that hit the US in the autumn of 2008. The Republicans have convinced many voters that the intervention by the Democrats, not the catastrophe George W. Bush bequeathed, explains the malaise. It is a propaganda coup.

          Does President Obama deserve blame for this outcome?  No and yes. No, because his treatment was right, in principle; yes because it was too cautious, in practice.

          It is essential to remember the context. Large financial crises do long-lasting damage. As the University of Maryland’s Carmen Reinhart and Harvard University’s Kenneth Rogoff note in an update of previous work: “More often than not, the aftermath of severe financial crises shares three characteristics. First, asset market collapses are deep and prolonged… Second, [it] is associated with profound declines in output and employment… Third, the real value of government debt tends to explode.” As ever, the risks built up, disregarded, in the boom and materialized in the bust.

          As Prof. Reinhart and Vincent Reinhart of the American Enterprise Institute note in a paper presented at this year’s  economic policy symposium at Jackson Hole, the US shared with several other high-income countries (notably, Spain, the UK and Ireland) a massive rise in house prices, credit and the financial sector’s balance sheet: between 1997 and 2007, real US house prices rose by 87%, the ratio of US financial sector debt to gross domestic product rose by 52%  and the ratio of total private debt to GDP rose by 10%. This was a disaster waiting to happen.

          What has made managing the bust far more difficult is the fact, demonstrated in the Reinhart and Reinhart paper, that this has been by far the biggest global financial crisis since the second world war.

          So how ell has the US economy done in this crisis? Quite well, in some respects, above all on overall economic output; less well, in others, notably unemployment.

          On average, real GDP per head (at purchasing power parity) fell by 9.3% in the previous crises studied by Profs. Reinhart and Rogoff. This time it fell by 5.4%in the US. The unemployment rate rose by seven percentage points in previous crises, on average. This time, US unemployment rose by 5.7 percentage points.

          This contrast between poor US performance on unemployment and better performance on output, by historical standards, caries over to comparisons between the US and other large high-income countries.

          Despite being at the epicentre of the crisis, the US experienced a smaller proportional decline in output per head than other large high-income countries, except France. But unemployment rose far faster in the US than elsewhere. The explanation is that US productivity growth was exceptionally fast, above all in 2009.

          What, then, does this performance tell us about US policy? The answer is that it did well in terms of what it did address, but far less so in terms of what it did not address.

          As Lawrence Summers, the president’s chief economic adviser, noted at the FT’s “View from the Top” conference in New York on October 7, the administration’s focus was on “the return of stability, confidence and the flow of credit to support strong recovery.”

          The elements were: support for the financial system – through the troubled asset relief program, inherited from the previous administration, financial guarantees and “stress tests” on banking institutions; the fiscal stimulus; and the actions of the Federal Reserve to sustain the flow of credit.

          By their nature, such policies work by sustaining demand and so output. Their impact on employment (and unemployment) is in direct. As it turned out, productivity growth was so strong that not too bad a performance, in terms of output, failed to prevent the surge—— in unemployment. One would have expected supporters of the free market to conclude that the US economy and, particularly, its labor market, remains flexible, under this “socialist” president. One would habe expected them to conclude, too, that more stimulus was needed.

          After all, it was quite modest: fiscal stimulus was less than 6% of GDP and so accounts for less than a fifth of the cumulative deficits of 2009, 2010 and 2011, while monetary policy is caught in a liquidity trap.

          The truth is not that policy was foolhardy and failed, but that it was too timid and so could not succeed. A big mistake was the failure to address the labor market directly, perhaps by temporarily slashing payroll taxation. There were other mistakes, too: the effort to reduce the overhang of household debt should have been stronger.

          Yet even the hated TARP looks remarkably effective in hindsight. As Mr. Summers noted, its cost to the taxpayer looks likely to be 1/3 percent of GDP. This is far less than the cost of the bailout of the savings and loans institutions in the 1980’s. It is also far less than the direct fiscal cost of comparable crises elsewhere.

          Unfortunately, the Republicans have succeeded in persuading a large enough portion of the American public that if the patient had been left entirely alone, he would be in perfect health today. This is surely a fairy story. But voters naturally pay little attention to calamities averted. They focus only on how far experience falls short of what they desire. Mr. Obama gains no credit for the former and much blame for the latter. His aspirational rhetoric no doubt worsened the disappointment.

          The president’s willingness to ask for too little was, it turns out, a huge strategic error. It allows his opponents to argue that the Democrats had what they wanted, which then failed. If the president had failed to get what he demanded, he could argue that the outcome was not his fault. With a political stalemate expected, further action will now be blocked. A lost decade seems quite likely. That would be a calamity for the US – and the world. – Financial Times.




Securing our economic future  

By Cielito Habito
Philippine Daily Inquirer

25 October 2010

MUCH OF the rest of the world worries about the possibility of a double-dip recession in the western economies, particularly in the United States and Europe. The fear is that if these major economies crumble again, this time from shaky government finances brought on by spending sprees earlier meant to stimulate their sagging economies, then smaller economies will be dragged down as well, again. The fear is not without basis; I can cite at least three.

One, even otherwise strong and dynamic economies around us, especially Singapore, Thailand, Malaysia and Taiwan, were flattened by the 2008-2009 global financial crisis whose epicenter was on the other side of the world. All four economies were forced into significant contractions in 2009, with their economies shrinking by an average of 2 percent. So a relapse on the crisis in the West could logically hurt them again.

Two, Europe is in a mess. Erstwhile stronger European economies have been forced into massive government spending cuts that are provoking social unrest. The past week saw riots in France, where the government has moved to raise the retirement age to 62 in a bid to save the state pension system from collapse. Spain and Greece have already had their own share of violent protests over massive spending cuts; Portugal and Ireland are similarly vulnerable. All these put the entire European economy at risk.

Three, the US economy continues to falter, lacking clear direction, persistently marked with a mix of good and bad news, seemingly tentative at every turn. One wonders whether it is headed the way of Japan, where decades of boom had inflated a bubble whose collapse led to economic stagnation that has lasted for well over a decade—with no clear rebound in sight. Is the largest economy in the world now likewise headed for a prolonged slump? Would this not drag down all the rest of us into further economic difficulties?

Well, maybe so for many of our neighbors. But to my mind, not for the Philippines. In fact, I think our economic future is looking up, be it in the short or long term. And I think there is good reason for this.

Unlike our hard-hit neighbors, we remained on an expansion mode through the global crisis, still managing to grow at a positive 1.1 percent last year. There are several reasons for this, not the least of which was remittance inflows that kept growing despite troubles in the economies hosting our overseas workers. The relative under-development of our export sector also proved to be a blessing in disguise, as we had less to lose when the big export markets dried up. For these and other reasons, we will continue to be less at risk from another round of the same.

What I find particularly encouraging is the dramatic turnaround in overall investment and in manufacturing we have been seeing since early this year. This is quite remarkable, as both had been sluggish for the past 10 years. There is something in the election of the new government that seems to have unleashed newfound confidence in our economy; now, domestic and foreign investors are betting on our economy big time. We see this in private investment data which have been recording double-digit growth, especially in durable equipment and private construction, since the start of the year. In contrast, whatever investment growth we saw in past years had been dominated by government investments through public construction.

What I see happening is that private companies who held back on expansion plans for many years are now making up for lost time, and coming back with a vengeance. Major firms are lining up bold new capital projects at a scale not seen in recent memory. Clear evidence of this is the growth in bank lending, whose 9 percent growth over the past year triples last year’s loan growth rates. A slight damper may be the recent—and possibly still forthcoming—typhoon damage. But then again, such disasters draw an equivalent amount in repair, restoration and rehabilitation work which comprise new economic activities, well offsetting declines due to the damage itself.

All this is in the short term. Over the long term, there’s even more reason to be confident, whether one looks at our internal or external circumstances. Internally, God has blessed this country with unusually abundant rich natural wealth and a resilient, hardworking people. We are known to be the fifth most mineral-endowed country worldwide, and our rich array of plant and animal life classifies us as a mega-biodiversity country. The challenge has been in managing these rich resources properly and judiciously for the broadest benefits of the country. Furthermore, as an archipelagic country, we are inherently positioned to be a leader in the maritime industries, especially in shipping services, and ship building and repair. And so on.

On the external front, certain key global megatrends are in our favor, such as aging populations in rich countries and the continuing drive toward outsourcing, to name two. The first offers vast opportunities in medical tourism, retirement havens, and care giving services and facilities. We are already cashing in on rapidly growing demand for outsourcing, especially call centers, animation, transcription and design services—much more than our available skilled personnel so far can handle, in fact.

Still doubtful on our economic prospects? The missing element all along has been good governance, and to my mind, for as long as we all work to achieve it—and more importantly, to deserve it—then there is a bright economic future ahead of us.

For advice on above subject, you may contact J.A.B. Bulao & Associates at or send a message to  Cell No. 09155205254.