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Solid U.S. Job Market May Be Undercutting Trump’s Tax-Cut Case

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  • Solid U.S. Job Market May Be Undercutting Trump’s Tax-Cut Case

President Donald Trump’s economic team says it won’t be satisfied until Americans workers earn more — and aggressive tax cuts are essential for those fatter paychecks.

But with unemployment at its lowest rate since before the financial crisis, the world’s biggest economy may already be nearing top speed. That means a big fiscal boost resulting from tax changes could stoke inflation to levels that would prompt the Federal Reserve to raise borrowing rates faster than anticipated. If that happens, Trump’s ambitious growth goals could be jeopardized.

The unemployment rate now sits at 4.4 percent after U.S. employers hired more workers than expected in April. But wages were a soft spot, climbing just 2.5 percent from a year earlier. In an interview Friday with Bloomberg TV after the figures were released, senior White House adviser Gary Cohn said the administration wants to see wages rise faster.

“We’re doing OK, but you see from the data, we’re doing OK with jobs that don’t pay that much,” said Cohn, director of the National Economic Council. “We need to bring back the manufacturing jobs that pay a lot. We need to bring back the service jobs that pay a lot.”

Cohn along with other administration officials say their plans to revise the tax system, cut regulatory red tape and negotiate better trade deals will convince more companies to stay or return to the U.S., spur more higher paying jobs and ultimately increase consumer spending. They say that will help to lift economic growth to 3 percent within two years, a rate not seen on an annual basis in more than a decade.

“So we’re doing a very big tax cut. We need it,” Trump said during an interview with Bloomberg News on May 1. The U.S. economy’s “not growing, it’s not growing at all. We need something — we need a stimulus.”

Stimulating Demand

The question is whether the U.S. economy is even capable of growing at that level without overheating, economists say. And the scant details included in the Trump administration’s tax plan released last week are creating uncertainty about how much growth the cuts can actually generate.

One way to boost growth through tax reform is by stimulating demand, said Douglas Elmendorf, a former official at the Fed and the Congressional Budget Office, who is now dean of Harvard University’s John F. Kennedy School of Government. But demand isn’t nearly as weak as it was in 2009, when the U.S. government rolled out a $787-billion stimulus package, he said.

The economy was also arguably in deeper trouble in 1986, when Ronald Reagan pulled off what some called the biggest overhaul of the U.S. tax system in history. The economy was coming out of a recession only a few years before, and while the jobless rate was coming down from its peak, it was still about 7 percent.

The situation isn’t nearly as dire now. “Any increase in demand spurred by tax changes will be very much offset by tighter monetary policy,” said Elmendorf.

“The other way to spur economic activity and boost jobs is by creating structural economic changes that boost the potential output of the economy, for example by increasing capital investment,” he said. Whether the administration can do that depends on hundreds of specific features of the tax plan that they have not spelled out.

Individual Cuts

Cohn and Treasury Secretary Steven Mnuchin released an outline of Trump’s tax plan on April 26 that borrowed heavily from the president’s campaign themes. The plan would cut tax rates for all businesses to 15 percent. The current corporate tax rate is 35 percent, though many companies trim their bills via various deductions and credits.

For individuals, Trump wants to consolidate the existing seven tax rates to three, with a top rate of 35 percent, down from the current 39.6 percent.

Former U.S. Federal Reserve Chairman Ben Bernanke said earlier this week in an interview on Bloomberg TV that the Trump administration’s plans to cut personal tax rates appear ill-timed and may do little to spur a higher rate of economic growth.

“Why not think about improving the efficiency of the corporate tax code, or doing infrastructure that I think would have more direct effects on supply and potential output than a personal tax cut?” Bernanke said.

Laffer Curve

The Trump tax plan didn’t specify many pay-fors to balance the cuts, but said it would eliminate individual deductions other than those for home-mortgage interest and charitable giving. It also called for eliminating unspecified “tax breaks for special interests.”

Still, the Committee for a Responsible Federal Budget released a rough estimate that Trump’s plan could cost the government $3 trillion to $7 trillion over a decade — potentially “harming economic growth instead of boosting it.” White House Budget Director Mick Mulvaney has dismissed cost estimates of the plan, saying there’s not enough detail for accurate projections.

Sarah Huckabee Sanders, a White House spokeswoman, said Friday during a press briefing that she wasn’t ready to comment on whether the cuts in a tax package should be offset so they don’t add to the deficit.

Economist Arthur Laffer, who advised the Trump campaign, first popularized the notion that tax cuts spur growth in jobs and the economy — and thus pay for themselves — in a 1974 meeting with Ford administration officials. His simple “Laffer Curve” formula, sketched on a paper napkin, jumpstarted the supply-side and trickle-down economics ethos that underpinned the 1986 Reagan tax cuts. The formula didn’t appear to work, as the federal budget deficit soon ballooned.

The administration may also be prevented from reaching its growth goal by demographic shifts that are holding back labor productivity, according to Peterson Institute for International Economics senior fellow William Cline.

“In the ideal world of the supply side economist, the kind of tax cut you want is the kind that would create its own demand immediately and would not be inflationary,” said Cline. “The evidence for that kind of tax cut is not very strong.”

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Brent Crude Falls to $84.12, WTI Rises to $80.19

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In a cautious market, oil prices showed mixed movements in Asian trade on Tuesday.

Global benchmark Brent crude oil, against which Nigerian oil is priced, experienced a slight decline of 13 cents, or 0.15%, to settle at $84.12 per barrel.

Meanwhile, U.S. West Texas Intermediate (WTI) crude oil saw a modest increase of 14 cents, or 0.17% to $80.19 per barrel.

The recent fluctuations come after both benchmarks posted significant gains of around 2% on Monday, marking their highest closing prices since April.

The market’s attention has now shifted back to fundamental factors, which have exhibited signs of softness for some time.

Francisco Blanch, a commodity and derivatives strategist at Bank of America, noted in a client note that global crude oil inventories and refined product storage in key locations such as the United States and Singapore remain elevated.

“The oil market shifted its focus back to fundamentals, which have been soft for some time,” Blanch stated, highlighting the broader concerns about global demand growth.

Data from the first quarter of the year indicated a deceleration in global oil demand growth to 890,000 barrels per day year-on-year, with further slowing likely in the second quarter.

Also, according to the country’s statistics bureau, China’s oil refinery output fell by 1.8% year-on-year in May due to planned maintenance and higher crude costs.

Market participants are also keenly watching for further indications on interest rates and U.S. demand trends, with several U.S. Federal Reserve representatives scheduled to speak later on Tuesday.

Despite the mixed signals, some analysts remain optimistic about the impact of OPEC+ supply cuts.

Patricio Valdivieso, vice president and global lead of crude trading analysis at Rystad Energy, said, “The latest guidance provided by OPEC+, as well as their unchanged 2.25 million barrels per day demand growth outlook, signals a stagnation in oil supply growth for 2024 and an apparent downside risk to production in 2025.”

Valdivieso further noted the disconnect between OPEC+’s demand outlook and those of other agencies, making it challenging to adopt a fully bearish stance on the market.

This sentiment has been reinforced by recent investor behavior, with hedge funds and other money managers purchasing the equivalent of 80 million barrels in key petroleum futures and options contracts over the week ending June 11.

Support for the market has also come from a rebound in refining margins, particularly in Europe and Asia.

Sparta Commodities analyst Neil Crosby pointed out that refining margins at a typical complex refinery in Singapore averaged $3.60 a barrel for June so far, up from $2.66 a barrel in May.

As the market navigates these dynamics, the cautious optimism among investors and analysts suggests a period of continued volatility and adjustment, with fundamental factors and policy decisions playing pivotal roles in shaping future price movements.

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Energy

Dangote Refinery’s Power Production Dwarfs National Grid’s 11-Year Progress

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The stark contrast in power generation between Nigeria’s national grid and Dangote Refinery has come into sharp focus as Dangote Refinery generates twice the national power production.

Over the past eleven years, Nigeria has managed to add a mere 760 megawatts (MW) to its national grid, while the Dangote Refinery has outpaced this growth significantly with  1,500 MW in a much shorter timeframe.

For decades, Nigeria has grappled with chronic power shortages, an issue that has repeatedly dominated election campaigns and policy debates.

Data from the Nigeria Electricity System Operator revealed that power delivery from Generation Companies (Gencos) to Distribution Companies (Discos) via the Transmission Company of Nigeria (TCN) has seen only a modest increase.

From an average of 3,400 MW in November 2013, it has risen to 4,160 MW as of June 12, 2024, marking a 22 percent increase.

In stark contrast, the Dangote Refinery, which began construction in 2018, now produces 1,500 MW of power for its operations.

This significant output not only surpasses the national grid’s decade-long expansion but also emphasizes the private sector’s ability to address Nigeria’s power challenges more efficiently.

“We don’t put pressure on the grid. We produce about 1,500 megawatts of power for self-consumption,” stated Aliko Dangote at the Afreximbank Annual Meetings and AfriCaribbean Trade & Investment Forum in Nassau, The Bahamas.

This development underscores concerns regarding the slow pace of growth in Nigeria’s power sector despite substantial investments and an 11-year-old privatisation effort.

“The government and some operators in the sector may claim there has been some form of growth since 2013, but in actual terms, how many people are benefiting from the privatised power sector?” questioned Charles Akinbobola, a senior energy analyst at Sofidam Capital.

He added, “The challenge of the power sector has not entirely been the scarcity of funds. Several trillions of naira have been pumped into that industry. The sector has been plagued by the shortcomings of its managers.”

Comparatively, Nigeria’s power production capacity of 13,000 MW falls significantly short of South Africa’s 58,095 MW, despite having a similar-sized economy and a quarter of Nigeria’s population.

The ageing national grid, however, delivers only about 4,000 MW to over 200 million citizens—roughly the power consumption of Edinburgh’s 548,000 residents.

Other African nations have made more significant strides in addressing their power needs.

Egypt, for instance, added 28,229 MW to its national grid between December 2015 and December 2018, achieving a total installed capacity of 58,818 MW.

This was accomplished through a fast-track project and a substantial partnership with Siemens, adding 14,400 MW in just 2.5 years.

The sluggish growth of Nigeria’s power sector is not just a technical issue but a significant economic one. Rising energy costs and unreliable power supply have disrupted productive activities, forcing many factories to self-generate more than 14,000 MW of electricity.

According to the Manufacturers Association of Nigeria, member companies spent N639 billion on alternative energy sources between 2014 and 2021, further highlighting the inefficiencies within the public power supply system.

“The power sector’s inefficiencies cost consumers billions of naira and stifle economic growth,” noted Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise. “There are issues of technical and commercial losses which are yet to be addressed. These inefficiencies are costs that consumers are compelled or expected to pay for as part of the cost recovery argument.”

The stark contrast in power generation between the Dangote Refinery and the national grid serves as a wake-up call for Nigeria’s power sector.

It underscores the urgent need for comprehensive reforms, better management, and increased investment to meet the growing energy demands of the nation’s burgeoning population.

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Crude Oil

Nigerian Oil Theft Escalates to 400,000 Barrels a Day, Exposing Systemic Corruption

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A recent report has revealed that Nigeria’s daily oil losses surged to 400,000 barrels as efforts to curb crude oil theft remain ineffective.

This escalation from 100,000 barrels per day in 2013 underscores the severe and worsening challenge facing the nation’s oil sector.

The report, produced by the public policy firm Nextier, is the result of several months of in-depth investigation.

It reveals a complex web of sophisticated networks involving powerful actors, foreign buyers, security personnel, transporters, and government officials.

This elaborate system facilitates the large-scale theft of crude oil, which has been a significant drain on Nigeria’s economy.

From 2009 to 2021, Nigeria lost 643 million barrels of crude oil, valued at $48 billion, due to theft. This loss represents more than half of the nation’s national debt as of 2021.

The situation has also severely impacted Nigeria’s ability to meet its OPEC quotas, which have dwindled from 2.5 million barrels per day in 2010 to just 1.38 million barrels per day.

The report, authored by Ben Nwosu, an associate consultant at Nextier, and Ndu Nwokolo, a managing partner at Nextier, paints a grim picture of the local dynamics fueling this crisis.

It highlights the involvement of multiple small-scale artisanal actors, who are often supported by local political and security forces. These local actors contribute to the creation of underground economies, further complicating efforts to curb theft.

Environmental hazards are another grave concern. Illegal refining processes, characterized by uncontrolled heat and poorly designed condensation units, have led to numerous explosions. Between 2021 and 2023 alone, these operations resulted in 285 deaths.

Despite these dangers, illegal refineries continue to thrive due to economic necessity and systemic corruption.

Nigeria’s four refineries, which have a combined capacity of 445,000 barrels per day, are currently operating at only 6,000 barrels per day due to mismanagement and corruption.

This shortfall forces the country to rely heavily on imported refined products, further exacerbating the situation.

Massive corruption in oil importation and subsidies has led to billions of naira being unaccounted for between 2016 and 2019.

Moreover, the government’s inability to support modular refineries has perpetuated reliance on illegal operations.

Security forces are often implicated in the theft, providing protection for a fee. Although recent measures, such as the destruction of illegal refineries, have offered temporary relief, these efforts have been short-lived.

New illegal operations quickly emerge, perpetuating the cycle of theft and corruption.

The authors of the report emphasize that addressing this complex issue requires more than punitive measures. They call for a comprehensive approach that tackles the root causes, including the need for effective governance and economic opportunities for affected communities.

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