Piracy in Somalia Threatens Global Trade - Feeds Local Wars

A report by Chatham House.

Summary:

• Piracy off the coast of Somalia has more than doubled in 2008; so far over 60 ships have been attacked. Pirates are regularly demanding and receiving million-dollar ransom payments and are becoming more aggressive and assertive.
• The international community must be aware of the danger that Somali pirates could become agents of international terrorist networks. Already money from ransoms is helping to pay for the war in Somalia, including funds to the US terror-listed Al-Shabaab.
• The high level of piracy is making aid deliveries to drought-stricken Somalia ever more difficult and costly. The World Food Programme has already been forced to temporarily suspend food deliveries. Canada is now escorting WFP deliveries but there are no plans in place to replace their escort when it finishes later this year.
• The danger and cost of piracy (insurance premiums for the Gulf of Aden have increased tenfold) mean that shipping could be forced to avoid the Gulf of Aden/Suez Canal and divert around the Cape of Good Hope. This would add considerably to the costs of manufactured goods and oil from Asia and the Middle East. At a time of high inflationary pressures, this should be of grave concern.
• Piracy could cause a major environmental disaster in the Gulf of Aden if a tanker is sunk or run aground or set on fire. The use of ever more powerful weaponry makes this increasingly likely.
• There are a number of options for the international community but ignoring the problem is not one of them. It must ensure that WFP deliveries are protected and that gaps in supply do not occur.

Number of Piracy Attacks and Attempts in the Gulf of Aden

• 

Source: Chatham House

Links:

Pirates off Somalia Get $18 - $30 million in Ransoms

On November 10, the European Union (EU) launched a secunity operation to combat Somalian pirates

Update, November 18, 2008: Somali pirates have hijacked a Saudi supertanker carrying a cargo of $100 million in oil. The capture of Sirius Star 450 nautical miles southeast of Kenya's Mombasa port, and way beyond the Gulf of Aden where most attacks have taken place this year, is their boldest attack and the culmination of several years' increasing activity.

Piracy Threatens Oil Transit through Gulf of Aden

Bab el-Mandab, the strait connecting the Red Sea with the Gulf of Aden and the Indian Ocean, has come under the attack of pirate vessels. Ships have been captured and their crews held for ransom. This threatens some 3.3 million barrels of crude, or 3.9% of daily world supply, that moves through the strait headed east for the Suez Canal.

Oil Transit Points Through Middle East Straits and
Percent of Daily Oil Demand Carried

Source: Energy Information Administration

Daily percent of oil carried:
Straits of Hormuz (Persian Gulf): 19.4% of daily demand
Bab el-Mandab (Gulf of Aden): 3.9% of daily demand
Suez Canal (Red Sea): 5.3% of daily demand

Links:
Somali Pirates Grab Ukranian Ship Loaded with 30 Tanks

Pirates from the failed African state of Somalia have attacked at least 61 ships in and around the Gulf of Aden this year (2008), 17 of them in the first two weeks of September (2008) alone, according to the International Maritime Bureau's piracy reporting center in Malaysia. That compares with 13 attacks in the area for all of 2007.

Somali Pirates Demand $20 Million to Release Ship

Navy Boats Monitor Hijacked Ship

Update: Developed Nations Push Back on Piracy

Somalia

Source: LonelyPlanet.com

A Brief History of the Federal Budget Deficit and Surplus (Such as it Was)

The Congressional Budget Office (CBO) has issued its September 2008 budget and economic update. The CBO estimates that the deficit in 2008 will be over twice the shortfall of 2007, rising from $161 billion in 2007 (or 1.2% of GDP) to $407 billion in 2008 (about 2.9 percent of GDP). The CBO says:

The significant expansion in the deficit is the result of a
substantial increase in spending and a halt in revenue
growth. In 2008, CBO estimates, federal spending will be
8.3 percent higher than it was in 2007; at the same time,
total revenues will be less than they were in 2007.

Total Federal Budget Deficit (Surplus) 1967 - 2008 (actual) - 2018 (projected)

Source: CBO

The only time in recent history the Federal budget has run a surplus was for four years (1996 - 2001) of the Clinton administration. Although the economy has soured due to stagnating wages, layoffs, the credit crunch, and the housing debacle, the Federal deficit is in no where near as bad shape as it was during the stagflation era of the '70s and early '80s.

We will have to wait and see about the CBO's prognostications. As Yogi Berra said, "Prediction is very hard, especially about the future."

Defense outlays comprise nearly 66 percent of Federal discretionary outlays. It costs alot to be the policeman of the world:

Federal Discretionary Budget Authority: 2002 - 2008

Source: CBO

Contributing to the run-up in the record price of oil, the CBO report shows that demand for oil has far outpaced the supply since 2005, and year-over year demand growth has also outstripped supply growth since 2005.

World Oil Supply and Demand: 2002 - 2008

Source: CBO

Data shows that the great oil price run-up of the '00s, not seen since the early 1980s, dates from the beginning of this mismatch in oil supplies and oil demand. Tell me again why Congress needed to hold hearings on this issue? Couldn't they just have read their own report?

Oil Price Trend: 1976 - 2008

Source: WSJ

Cost of Shipping a Standard Container from China to the U.S.

Cost of shipping a standard 40-foot container of goods from China to the US:

2000 -- $3,000
2008 -- ~$8,000

Increase: 266% over eight years, caused largely by the increase in the price of oil from around $20/barrel to triple digits today. The result has been a dimming of appeal among manufacturers to outsource manufacturing to China and other Asian countries. The price of oil is making the world round, again.

The Strategic Petroleum Reserve

The Strategic Petroleum Reserve is a U.S. Government complex of four sites with deep underground storage caverns created in salt domes along the Texas and Louisiana Gulf Coast that store emergency supplies of crude oil.

Inventory

• Current inventory: Click to open inventory update window
• Highest inventory - On April 2, 2008, the SPR inventory exceeded 700 million barrels, the highest level ever previously held. The former record was reached in late August 2005, just days before Hurricane Katrina hit the Gulf Coast, causing the SPR to conduct emergency releases. Repayment of the Katrina loans and resumption of the RIK program (in 2007) has restored the inventory to its former level and beyond.
• Current storage capacity - 727 million barrels
• Current days of import protection in SPR - 58 days (Maximum days of import protection in SPR - 118 days in 1985)
• International Energy Agency requirement - 90 days of import protection (both public and private stocks)
  (SPR and private company import protection - approximately 118 days)
• Average price paid for oil in the Reserve - $28.42 per barrel

Drawdown Capability

• Maximum drawdown capability - 4.4 million barrels per day
• Time for oil to enter U.S. market - 13 days from Presidential decision

Strategic Petroleum Reserve Inventory August 2008

Iran has threatened to blockade the Straits Of Hormuz should its nuclear facilities be attacked. Should we look for a drawdown of reserves from the SPR in advance of an attack, since it takes 13 days to get reserves from the SPR to market, or would that send too loud a warning?

Due to security concerns, the exact location of the SPR storage sites has been removed from the DOE's web sites. However, this map remains:

Location of Strategic Petroleum Reserve Storage Sites

If you are any good at Google Maps you can likely spot the locations yourself. This is left as an exercise for the reader. Sometimes security is more about CYA than security.

More on politics and the Strategic Petroleum Reserve

40% of all Seaborne-Traded Crude Oil Moves Through the Straits of Hormuz Daily

17 million barrels of oil move through the Straits of Hormuz daily, 40% of all seaborne-traded crude oil. (This is about 25% of the world's total crude supply.) Closure of the Straits, even for a short time, as threatened by Iran if its nuclear facilities are attacked, would raise the price of crude to $300 per barrel, according to George Friedman, founder of StratFor, the Austin Texas-based global intelligence company.

(Source: Barrons, August 4, 2008, "In Sight, an Amicable Endgame in Iran")

Straits of Hormuz


Straits of Hormuz

See: Tehran Program Gains Influence in Israel's Election

Did the Oil Bubble Burst?

Since July 14, 2008 the price of oil has fallen nearly 23% to $122.19 from $145.18 per barrel. Oil futures prices show a steady decline far out into the future. Did the bubble just pop, or is this the effect of a high priced commodity pushing consumption down, conservation up, and accelerating a search for alternative energy sources? Isn't this the way the market is supposed to work?

Source: Wall Street Journal

Iraq's Oil Export Revenue and Output

Iraqi oil export revenue could hit $75 Billion in 2008 on exports of almost 2 million barrels a day, most of it from South Oil Co. In 2007 Iraq had exports of $40 billion. The 2008 figure meets more than 2% of global oil demand.

Source: Wall Street Journal

The Shape of the Price of Oil

The price of oil from 1976-2007, both adjusted for inflation and not adjusted for inflation:


Oil and the Federal Funds Rate, July 2007 - July 2008, after all of the conspiracy theories, a simple reason fot the rise in the price of oil?

How the Price of Oil Affects the US Economy

Economic forecasting firm Global Insight estimates that each $10 per barrel increase in oil prices raises gasoline prices by roughly 19 cents a gallon, cuts growth in consumer spending by a third of a percentage point, reduces employment by 100,000 and adds one-half percentage point to consumer price inflation.

From The Wall Street Journal, January 2, 2008