Wonkbook: How Iraq’s chaos could shake energy markets

June 18, 2014

Welcome to Wonkbook, Wonkblog’s morning policy news primer by Puneet Kollipara. To subscribe by e-mail, click here. Send comments, criticism or ideas to Wonkbook at Washpost dot com. To read more by the Wonkblog team, click here.


(AP Photo, File)

Wonkbook’s Number of the Day: $335 billion. That's how much money Americans gave to charity last year, nearing pre-recession levels.

Wonkbook’s Chart of the Day: Understand the Iraq turmoil's impact on oil with these four charts.

Wonkbook's Top 5 Stories: (1) A taste of 2008 for oil, gasoline prices?; (2) what to look out for at the Fed meeting; (3) one Supreme Court decision's sovereign-scale impact; (4) Obama's oceanic-proportion environmental move; and (5) Democrats' message to the FCC on net neutrality.

1. Top story: How the Iraq upheaval is affecting oil markets, gasoline

The Iraqi strife: Could it bring back 2008 oil prices? "If the conflict in Iraq forced a third of the country’s oil production offline, it could thrust crude prices up $40 per barrel, a group of former military leaders and energy experts warned Tuesday....Although supply fears have abated slightly, the conflict has so far increased the 'risk premium' embedded in international oil prices and put Brent crude at $113 per barrel mid-Tuesday....Concerns about the turmoil in Iraq are giving fresh fodder to those...who want the U.S. to wean its cars and trucks off oil as a fuel source and to rely more on alternatives, such as natural gas." Jennifer A. Dlouhy in the Houston Chronicle.

Primary source: Securing America's Future Energy's issue brief.

It could, if gasoline prices are any indication. "Gasoline in the U.S. climbed this week, boosted by a surge in oil, and is expected to reach the highest level for this time of year since 2008. The pump price averaged $3.686 a gallon yesterday, up 1.2 cents from a week earlier....Oil, which accounts for two-thirds of the retail price of gasoline, gained $2.49 a barrel on the New York Mercantile Exchange in the same period and $4.88 in the month ended yesterday. The jump in crude, driven by concern that the crisis in Iraq will disrupt supplies, may boost pump prices by 10 cents a gallon at a time when they normally drop, according to forecasts including one from the EIA." Lynn Doan and Moming Zhou in Bloomberg.

Longer-term outlook: Iraq's oil growth is at risk, IEA says. "Iraq's oil growth targets look increasingly at risk, the International Energy Agency said, as threats to supplies from political instability and violence grow just as demand is picking up due to a stronger global economy. Iraq is the second-largest producer in OPEC and its northern exports have been offline since March. OPEC output has also been hit by unrest in Libya, sanctions on Iran and oil theft in Nigeria....Still, the adviser...also said in its Medium Term Oil Market Report on Tuesday that global growth in oil demand may start to slow down by the end of this decade due partly to high prices, and shale oil would start to spread outside the United States." Alex Lawler in Reuters.

Explainers:

Charts: 4 charts that explain Iraq's impact on global oil. Meagan Clark in International Business Times.

The upshot of the U.S. oil boom: Fewer price shocks. "U.S. dependence on Mideast oil is, by a variety of measures, at a generational nadir....Higher oil prices are 'a risk factor and one that we're taking very seriously,' said Jason Furman, chairman of the White House Council of Economic Advisers....Increased domestic oil production and more-efficient cars mean the U.S. is more insulated from oil shocks than in past decades, he said, 'but no one is fully insulated.' Still, while climbing oil prices would hurt U.S. consumers, any increase would benefit U.S. energy producers, providing a partial offset for the overall U.S. economy." Josh Zumbrun in The Wall Street Journal.

This won't change oil supplies now, but Canada just backed a controversial oil pipeline: "The Canadian government approved Enbridge Inc.’s Northern Gateway pipeline, eliminating the final major regulatory obstacle for the conduit that would move Alberta oil to the Pacific coast for shipment to Asia. The approval of the C$6.5 billion ($6 billion) project by Prime Minister Stephen Harper’s cabinet is subject to Enbridge satisfying the 209 conditions placed on the proposal by a regulatory review panel in December." Jeremy van Loon and Andrew Mayeda in Bloomberg.

Meanwhile, the Keystone XL pipeline remains mired in delays: "Northern Gateway has become something of backup for Canada, as approval for the Keystone XL pipeline remains mired in Washington. If built, Northern Gateway would ship about 500,000 barrels of bitumen a day to the coast compared with the 700,000-barrel-a-day capacity of Keystone XL, which would take oil sands production to the Gulf Coast of the United States. When Northern Gateway is combined with the country’s other pipeline plans, Canada could expand shipments from the oil sands by three million barrels a day." Ian Austen in The New York Times.

Perhaps predictably, the conflict is shaking up the debate over crude-oil exports, Keystone XL. "With domestic oil production climbing, API and other industry groups have been pressuring the Obama administration to lift 39-year-old restrictions that bar most U.S. crude from being sold overseas. But Middle East politics and the turmoil in Iraq could add new challenges to the oil industry’s campaign. If the fighting causes world crude supplies to tighten further, it could frighten lawmakers who are already skittish about opening the valves for crude to flow outside the U.S....Gerard and a labor union leader suggested that the conflict in Iraq could add to arguments in favor of Keystone XL." Jennifer A. Dlouhy in the Houston Chronicle.

Background reading: The price of oil and gasoline is much more complex than one pipeline. Glenn Kessler in The Washington Post.

Related: Crude-oil exports hit new milestone. Jennifer A. Dlouhy in the Houston Chronicle.

In other energy-export news: Coal's surprising boom. "The boost in exports has been a welcome surprise for an industry reeling from environmental restrictions and a fall in demand and prices here in the U.S....Flynn says the boost in exports is due in large part to an abundance of cheap, natural gas in the U.S. which has deflated the domestic demand for coal. But the rest of the world pays much more for its natural gas supplies....Flynn says that's allowed American coal to find a healthy market elsewhere." Jackie Northam in NPR.

Maybe that has to do with global coal use hitting highest level in 44 years, according to BP. "The findings are another indication that consumers are prioritizing cheap fuels over efforts to rein in greenhouse gas emissions blamed for global warming. Coal is the dirtiest fossil fuel, and use of it expanded at utilities from China to Germany....Coal’s share of global energy use reached 30.1 percent, just below the 32.9 percent share for crude oil, which lost market share for a 14th consecutive year. China was the world’s biggest coal consumer, followed by the U.S. and India." Nidaa Bakhsh in Bloomberg.

Other energy/environmental reads:

World's energy systems vulnerable to climate change, report says. Fiona Harvey in The Guardian.

Top opinion

THOMA: The latest inflation worry is overblown. "Worries about inflation have been pervasive ever since the Fed began trying to lift the economy out of recession. If the Fed does not tighten policy very soon we have been told repeatedly, an outbreak of inflation is inevitable. But so far, those worries have been unfounded....The Fed has learned its lesson and signs of an inflation problem will be met by interest rate increases sufficient to end the threat. Thus, the big fear at present is not that the Fed will enable a wage price spiral that results in high and persistent inflation; it’s that the Fed will respond too quickly to any sign of inflation and increase interest rates too soon." Mark Thoma in The Fiscal Times.

HOPKINS: Why Obamacare remains unpopular. "Today, we take that unpopularity for granted. But the law’s architects cobbled together a complex bill so that everyone could find something to like....Seen in that light, the law’s unpopularity is not a fact to be assumed but a puzzle to be explained. But that puzzle can’t be explained by 'death panels' or either party’s messaging on the issue. It also seems unlikely that a substantial share of the opposition to Obamacare comes from those who wanted to see more sweeping health care reforms. Instead, the public’s disapproval of Obamacare considered as a whole points to Americans’ broader relationship with the government, and our unwillingness to trust that it can accomplish what it sets out to do." Dan Hopkins in FiveThirtyEight.

VINIK: Yellen's delicate dance on inflation and wages. "Despite her strong rhetoric, Yellen hasn’t had to lead the Federal Open Market Committee (FOMC) through any big decisions. That will change soon, as Yellen must decide when the Fed will raise interest rates above zero for the first time since 2009. Raise them too soon, and it will choke off the recovery, denying wage growth for workers who have seen their wages stagnate for the past 15 years. Raising them too late, on the other hand, could lead to a bit of excess inflation....Fearing 1970s-level inflation, these inflation hawks are going to demand that the Fed raise interest rates in the near future....It would be a huge mistake for the Fed to prematurely raise rates." Danny Vinik in The New Republic.

CHAIT: Why reform conservatives' climate-policy prescriptions still fall short. "By endorsing subsidies for basic energy research, the reformist conservatives are (at least implicitly) accepting the validity of climate science, as well as the possibility of some government role in limiting the threat of climate change. And yet, even though they have moved a fair distance from mindless Republican climate orthodoxy...one obvious problem is that they present basic energy research as something close to a miracle cure — why spend tens or hundreds of billions of dollars complying with caps on greenhouse-gas emissions when instead we can spend a fraction of the sum on cool science?" Jonathan Chait in New York Magazine.

P. KLEIN: The problem with the health-system rankings study. "The problem with the Commonwealth Fund study is that it’s rigged to produce a result that favors socialized health care systems. The study determines that the U.S. system is worse because it lacks universal health insurance coverage and the report emphasizes 'equity' as one of the key factors in evaluating a health care system. But it’s an ideological decision to view equity as one of the most important factors in judging a health care system, just as it is for the study to leave out a factor such medical innovation, which would work to the advantage of the U.S., or choice, which would work against the centralized NHS." Philip Klein in the Washington Examiner.

Sports interlude: Most nonchalant father ever catches home-run ball while holding baby.

2. What really matters at the Fed meeting

Again, the Fed's taper isn't the real news from the meeting. "Given the lack of drama, all eyes will be focused on whether officials tip their hand on longer-term plans for interest rates. Policymakers, including new Fed Vice Chair Stanley Fischer, will release updated projections for the economy and for when they think rates should finally rise from near zero. They could also surprise investors with more detail on how they plan to eventually shrink the U.S. central bank's swollen balance sheet." Jonathan Spicer in Reuters.

Explainer: 5 things to watch for at the Fed meeting on Wednesday. Pedro Nicolaci da Costa in The Wall Street Journal.

Video: What are those dot plots about, anyway? Bloomberg TV.

What the Fed's 'reinvestments' debate says about its plan for rates. "Even though the Fed is buying long-term Treasuries and mortgage-backed securities...Some portion of those bonds either mature or get paid back each month, reducing the Fed's total holdings....That means just keeping its balance sheet stable requires the Fed to buy bonds each month to make up for the ones that have rolled off. The so-called 'reinvestments'...could soon take center stage as the Fed winds down QE by the end of the year. Under the plan adopted in 2011 to guide the Fed's exit from its extraordinarily large balance sheet and zero percent interest rates, the next step would be to end reinvestments, followed by the first rate hike since the recession. But now officials aren't so sure of that strategy." Ylan Q. Mui in The Washington Post.

Fed likely to scale back growth forecasts. "Federal Reserve officials, who have persistently overestimated the strength of the economic recovery, predicted last June that the economy in 2014 would finally grow more than 3 percent for the first time since the recession. The updated forecasts the Fed will publish on Wednesday are likely to reflect more modest expectations. The economy, after all, actually shrank during a wintry first quarter. High hopes are being replaced once again by disappointing data. The Fed’s policy-making committee is still expected to announce another $10 billion cut in its monthly bond purchases, to $35 billion a month, in keeping with its plan to end the purchases this fall." Binyamin Appelbaum in The New York Times.

Consumer prices up most in more than a year, likely reassuring Fed. "The Labor Department said on Tuesday its Consumer Price Index increased 0.4 percent last month, with food prices posting their biggest rise since August 2011. Economists, who had expected consumer prices to rise only 0.2 percent, said the increase suggested a separate inflation gauge watched by the Fed also pushed higher in May, although it would still fall short of the central bank's 2 percent target....The broadening rise in prices should reassure Fed officials who have expressed concerns that inflation was too low, and it led some investors to raise bets the central bank would hike interest rates before the middle of 2015." Lucia Mutikani in Reuters.

Why the inflation news is bad for workers. "The latest economic data out Tuesday morning was generally good. Home building activity remained above the one million a year rate. Consumer prices rose 0.4 percent in May, such that inflation over the last year is now 2.1 percent, about in line with what the Federal Reserve aims for. But that inflation news carried with it a depressing side note. Now that the Consumer Price Index for May has been published, it is possible to determine inflation-adjusted hourly earnings for the month. And the number is not good....Five years after the economic recovery began, American workers have gone the last 12 months without any real increase in what they are paid." Neil Irwin in The New York Times.

But housing, another concern of Yellen, remains stubbornly weak. "U.S. housing starts and building permits fell more than expected in May, suggesting the housing recovery will likely remain slow for a while. Groundbreaking for homes fell 6.5 percent to a seasonally adjusted annual pace of 1 million units, the Commerce Department said on Tuesday....Housing is struggling to regain momentum after a run-up in mortgage rates and hefty increases in prices stifled demand. A shortage of properties has also weighed on the sector....Federal Reserve Chair Janet Yellen said last month there was a risk a protracted housing slowdown could undermine the economy." Reuters.

What will HUD nominee Castro do on housing? "After five years of focusing on stemming a record wave of home foreclosures, HUD faces a new crisis as tighter standards cause home lending to slump to a 17-year low. The Federal Housing Administration...is on pace to back only 500,000 loans for purchases this fiscal year, about half the number in fiscal 2010....Castro said he plans to navigate between helping lower-income homebuyers and avoiding the kind of financial stress that led to a bailout of the FHA in 2013....Industry groups that support Castro’s nomination...said he should focus on increasing homeownership once he gets to Washington." Clea Benson and Alexis Leondis in Bloomberg.

Housing nominee urges Congress to shut Fannie Mae, Freddie Mac. "President Barack Obama's nominee to lead the Department of Housing and Urban Development, Julian Castro, urged lawmakers on Tuesday to move forward with efforts to shutter Fannie Mae and Freddie Mac, saying the current housing finance system is not serving Americans well." Elvina Nawaguna in Reuters.

Long read: Mel Watt, top Fannie and Freddie regulator, faces tough affordable housing question. Jon Prior in Politico.

Other economic reads:

With business initiative, Obama aims to show he can act without Congress. Michael D. Shear in The New York Times.

Animals interlude: Wolf pup hiccups. Your Wonkbooker almost got the hiccups himself just watching this.

3. How one Supreme Court decision could shake up sovereign debt markets

The IMF worries about the precedent for similar situations elsewhere. "The major legal defeat Argentina suffered Monday in its decade-long fight against holdout bondholders could ricochet around the world’s sovereign debt markets, the International Monetary Fund warned Monday....Last year, the IMF warned that if Argentina lost its case against creditors, the case could set a precedent that gives holdouts outsized power over nations struggling to pay back their debts. That, the IMF warned, could undermine sovereign debt restructurings around the globe. Cutting the amount of debt owed to creditors is a last-chance emergency measure sometimes needed to prevent the collapse of entire economies." Ian Talley in The Wall Street Journal.

Explainer: How the U.S. Supreme Court brought Argentina to the brink of fiscal crisis. Matthew Yglesias in Vox.

Argentina is not amused. "Argentina’s president told a national television audience late Monday that the country would not abide by U.S. court rulings ordering payment of $1.3 billion to disgruntled creditors whose long-running legal battle against the nation received a boost from the U.S. Supreme Court earlier in the day....On Monday, the U.S. Supreme Court declined to consider Argentina’s appeal of a U.S. court of appeals order that the country pay bondholders who had refused to accept Argentina’s debt restructuring following a 2001 default....The Supreme Court actions Monday provided a legal victory for hedge fund billionaire Paul Singer and other investors who had pursued litigation against Argentina." Tom Hamburger and Roberto A. Ferdman in The Washington Post.

U.S. banks seen falling short of new debt funding rule. "Wells Fargo, State Street and JPMorgan Chase & Co are below or almost at minimum capital thresholds expected to be included in a rule still being hammered out by U.S. regulators that's meant to mitigate taxpayer losses in another financial crisis, according to a Reuters analysis. U.S. banks are already required to hold equity equal to about 10 percent of their balance sheet to serve as a shock absorber to cover the risk of a sharp drop in the value of loans, investments and other assets on their books. Banks expect U.S. regulators to require them to hold another 10 percent in bonds with maturities of more than a year and other instruments, as part of the forthcoming rule." Douwe Miedema in Reuters.

Other financial reads:

Stock exchange pricing model comes under fire in hearing. Sarah N. Lynch in Reuters.

Retirees suffer as $300 billion 401(k) rollover boom enriches brokers. John Hechinger in Bloomberg.

'Sesame Street' interlude: "C is for Cookie," the Pentatonix version.

4. Obama's environmental move of oceanic proportions

Obama wants to expand marine sanctuary. "President Obama announced Tuesday his intent to make a broad swath of the central Pacific Ocean off-limits to fishing, energy exploration and other activities. The proposal, slated to go into effect later this year after a comment period, could create the world’s largest marine sanctuary and double the area of ocean globally that is fully protected....The president will also direct federal agencies to develop a comprehensive program aimed at combating seafood fraud and the global black-market fish trade. In addition, the administration finalized a rule last week allowing the public to nominate new marine sanctuaries off U.S. coasts and in the Great Lakes." Juliet Eilperin in The Washington Post.

The ecological case for expanding the sanctuary. "These marine monuments are the ocean equivalent of national parks — areas of relative wilderness heavily protected from human use. The area covered by the new reserve features a large number of fish, marine mammal, coral, bird, and plant species that aren't found anywhere else in the world. There are also many endangered species, such as the hawksbill sea turtle and the humphead wrasse....While these are remote areas that don't suffer heavily from local pollution or commercial fishing, there are some tuna fleets that operate in the area....More importantly, though, the reserve is a proactive step in protecting these areas from future fishing." Joseph Stromberg in Vox.

Explainer: Why is Obama protecting a place you've never heard of? Juliet Eilperin in The Washington Post.

The sanctuary move matters — but don't overlook Obama's move on illegal fishing. "That was big news, and may have overshadowed another major announcement Obama made on the oceans front: a new directive to curb illegal fishing....The president said he is directing federal agencies to develop programs curbing illegal fishing, preventing 'seafood fraud' — passing off some types of fish as different species — and also keeping illegally harvested fish from getting into the U.S. market. Between 20 and 32 percent of seafood caught in the wild and imported into the United States is illegally caught, according to a recent study in the journal Marine Policy. That's bad news for fish and for fishermen, Obama said." Kate Sheppard in The Huffington Post.

Kerry calls for global research, action to protect oceans. "Secretary of State John Kerry opened a State Department conference on problems with ocean ecosystems Monday by calling for international efforts toward research and laws to protect oceans from overfishing, pollution and climate change. Kerry applauded regional and national actions to protection oceans, such as encouraging sustainable fishing and cutting down on trash, but said it is not enough." Timothy Cama in The Hill.

Prank interlude: Hundreds of people shop in slow motion at a Home Depot, then freeze.

5. Why Democrats' move on net neutrality matters

Democrats' bill would bar the FCC's 'fast lanes' net-neutrality proposal. "The proposal, put forward by Senate Judiciary Committee chair Patrick Leahy (D-Vt.) and Rep. Doris Matsui (D-Calif.), requires the FCC to use whatever authority it sees fit to make sure that Internet providers don't speed up certain types of content (like Netflix videos) at the expense of others (like e-mail). It wouldn't give the commission new powers, but the bill — known as the Online Competition and Consumer Choice Act — would give the FCC crucial political cover to prohibit what consumer advocates say would harm startup companies and Internet services by requiring them to pay extra fees to ISPs." Brian Fung in The Washington Post.

Why the bill matters, even though it won't pass Congress. "A Democratic bill to ban 'fast lanes' on the Internet isn't going to become law. Republicans have long opposed net-neutrality regulations, and as long as they control the House, they'll block legislation that would restrict the business choices of Internet service providers. But the Online Competition and Consumer Choice Act, introduced Tuesday by Sen. Patrick Leahy and Rep. Doris Matsui, isn't really about changing the law. It's about sending a message to the Federal Communications Commission." Brendan Sasso in National Journal.

A possible breakthrough on cybersecurity legislation? "Lawmakers have been considering legislation to help private companies better communicate about security breaches and cyber threats with the government and each other, but spats over liability and privacy protections have thwarted passage of comprehensive cyber security bills thus far. The bill by Feinstein and Chambliss would offer companies liability protections for monitoring their networks for hacking attempts and for sharing cyberdata with the government through the Department of Homeland Security, which would immediately disseminate the information to relevant federal agencies. The legislation would also require companies to remove personally identifiable information before sharing cyber data." Reuters.

Another animal interlude: Joey the cat loves to drink water from a spray bottle.

Wonkblog roundup

Why the euro crisis still isn’t over, in 1 chart. Matt O'Brien.

The generational battle of butter vs. margarine. Roberto A. Ferdman.

The Fed disagrees on what to do next — and it hasn’t even gotten to interest rates yet. Ylan Q. Mui.

Where gun stores outnumber museums and libraries. Christopher Ingraham.

Congress wants to know HUD won’t be "just a steppingstone" for rising star Julian Castro. Dina ElBoghdady.

Why law enforcement missed Elliot Rodger’s warnings signs. Harold Pollack.

Et Cetera

House hearing on GM will put Mary Barra on the spot. Matthew L. Wald and Bill Vlasic in The New York Times.

Phoenix VA gave out $10 million in bonuses in last 3 years. Craig Harris and Rob O’Dell in The Arizona Republic.

$1,000-a-pill drug by Sovaldi jolts U.S. health care. Ricardo Alonso-Zaldivar in the Associated Press.

20-somethings report better health, lower medical expenses under Obamacare. Adrianna McIntyre in Vox.

U.S. edges closer toward Europe on capital punishment views, experts say. Brian Knowlton in The New York Times.

Got tips, additions, or comments? E-mail us.

Wonkbook is produced with help from Michelle Williams and Ryan McCarthy.

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