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We like to think that when we deposit a dollar at the bank, it goes into a big vault and we can pull out that same dollar at any time. But that¿s not how the U.S. banking system works. Banks take that money and invest it to make money themselves, so cash gets spread around. This, naturally, leads to a big risk: What happens if those investments go sour? Well, you¿d be out of luck. You can¿t get your dollar back.
The Federal Reserve doesn¿t like that scenario, so it prohibits banks from putting all the cash it has on deposit on the line. In fact, the Fed forces banks to keep a portion of their assets at the Federal Reserve itself, to make sure that some of your assets won¿t get squandered if the bank¿s bets go south. These are called ¿reserves,¿ (hence, Federal Reserve. Got it? Good), and usually amount to 10% of the total cash kept in checking accounts.
These reserves are never exactly 10%, and banks like to keep a little extra in reserve ¿ not, as you might think, to make you more comfortable that they¿re in good financial shape, but rather so they can take that excess and lend it to other banks and make money off it. (They¿re banks, they can¿t help themselves.) The rate at which they make these loans is called the Federal Funds rate, which is set by the Federal Reserve¿s Federal Open Market Committee.
When you hear people chattering about how the Fed cut or hiked interest rates, this is what they¿re talking about: the interest rate banks can charge for lending money from their reserves. This begs the question: If these are essentially loans between banks, why is the Fed Funds rate so important for the rest of the economy?
Well, simply put, because loans make the financial world go round. Bank A lends Bank B $10,000 at a Fed Funds rate of 5%. Bank B then lends out $10,000 to a small business at 7%. The small business then takes that money and expands the business and hires new workers. Now someone is employed, Bank B has made interest off the loan, and Bank A is the richer for making it all happen. It¿s perhaps overly simplistic, but you get the idea. When you want the economy to thrive, you make lending cheaper.
Of course, sometimes you don¿t want the economy to thrive. In fact, you might want it to cool down, mostly to avoid money flooding the system and causing inflation. In that case, the Fed raises interest rates, making it difficult to lend or borrow.
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Monday, May 05, 2008
Purvin & Gertz Releases Global Petroleum Market Outlook
Comtex
HOUSTON, May 5, 2008 /PRNewswire via COMTEX News Network/ ----Purvin & Gertz announces the release of the Global Petroleum Market Outlook 2008. The study provides an in-depth analysis of global and regional markets for crude oil and refined products within a framework of world energy demand and economic activity through 2025. Supply forecasts are based on expected production levels of crude oil, natural gas, alternative fuels, and refining facilities in each country. The study considers the operating/commercial constraints of existing facilities, as well as capacity and start-up dates for new refining projects, in forecasting overall supply. Demand for refined products is analyzed and forecast in the context of emerging trends in biofuels, alternative fuels, vehicle preferences, and government mandates. The prospects for future world market developments are examined and the likely impact on crude oil trade, refined product trade, and pricing are assessed.
Key conclusions of this year's analysis include: -- For the third year in a row, high prices slowed growth in demand for refined products worldwide. Consumption declined in a large number of countries in 2007, and was virtually stagnant in a number of others. However, refined product demand growth continued in China, the Middle East and other regions resulting in net growth worldwide. Looking forward, demand growth is expected to be the strongest in the developing countries as their economies expand. -- The supply side has been severely challenged by widespread shortfalls in production in countries such as Nigeria, Mexico, Venezuela and the North Sea, to name a few. Traditional heavy crude suppliers are experiencing production challenges at a time when more heavy crude processing capacity is expected to start up. -- More aggressive biofuels mandates are contributing to supply growth in many countries, but our analysis indicates that not all targets will be met. -- The projected start-up of export refineries in various regions will provide more supply capacity at a time when demand growth is slowing. -- High crude oil prices combined with potential oversupply of light products will likely lead to lower worldwide refining margins over the next few years.
About Purvin & Gertz
Purvin & Gertz is an independent energy consulting firm providing technical, commercial and strategic advice. Purvin & Gertz specializes in servicing clients involved in the production, processing, transportation and marketing of oil, natural gas and gas liquids, and petroleum products. Headquartered in Houston, the firm consists of an international network of offices in Buenos Aires, Calgary, Dubai, Long Beach, London, Moscow and Singapore. Purvin & Gertz is an employee-owned consulting company, independent of any parent company, engineering firm, equipment manufacturer or process licensor. Please visit our website at http://www.purvingertz.com for more information. For expert comment contact Tom Manning or Alfred Luaces by phone at (713) 331-4000.
SOURCE Purvin & Gertz
http://www.purvingertz.com
Copyright (C) 2008 PR Newswire. All rights reserved
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