Articles tagged with "recession"
We are used to expecting that more investment will yield more output, but in the real world, things don’t always work out that way.
In Figure 1, we see that for several groupings, the increase (or decrease) in oil consumption tends to correlate with the increase (or decrease) in GDP. The usual pattern is that GDP growth is a little greater than oil consumption growth. This happens because of changes of various sorts: (a) Increasing substitution of other energy sources for oil, (b) Increased efficiency in using oil, and (c) A changing GDP mix away from producing goods, and toward producing services, leading to a proportionately lower need for oil and other energy products.
The situation is strikingly different for Saudi Arabia, however. A huge increase in oil consumption (Figure 1), and in fact in total energy consumption (Figure 2, below), does not seem to result in a corresponding rise in GDP.
At least part of problem is that Saudi Arabia is reaching limits of various types. One of them is inadequate water for a rising population. Adding desalination plants adds huge costs and huge energy usage, but does not increase the standards of living of citizens. Instead, adding desalination plants simply allows the country to pump less water from its depleting aquifers.
To some extent, the same situation occurs in oil and gas fields. Expensive investment is required, but it is doubtful that there is an increase in capacity that is proportional to its cost. To a significant extent, new investment simply offsets a decline in production elsewhere, so maintains the status quo. It is expensive, but adds little to what gets measured as GDP.
The world outside of Saudi Arabia is now running into an investment sinkhole issue as well. This takes several forms: water limits that require deeper wells or desalination plants; oil and gas limits that require more expensive forms of extraction; and pollution limits requiring expensive adjustments to automobiles or to power plants.
These higher investment costs lead to higher end product costs of goods using these resources. These higher costs eventually transfer to other products that most of us consider essential: food because it uses much oil in growing and transport; electricity because it is associated with pollution controls; and metals for basic manufacturing, because they also use oil in extraction and transport.
Ultimately, these investment sinkholes seem likely to cause huge problems. In some sense, they mean the economy is becoming less efficient, rather than more efficient. From an investment point of view, they can expect to crowd out other types of investment. From a consumer’s point of view, they lead to a rising cost of essential products that can be expected to squeeze out other purchases.
Posted by Gail the Actuary on November 16, 2012 - 3:30pm
Tags: eroei, iea, imf, oil prices, recession, shale oil, tight oil, us oil production, weo 2012, world energy outlook [list all tags]
The International Energy Agency (IEA) provides unrealistically high oil forecasts in its new 2012 World Energy Outlook (WEO). It claims, among other things, that the United States will become the world’s largest oil producer by around 2020, and North America will become a net oil exporter by around 2030.
Figure 1 shows that this increase comes solely from the expected rise in tight oil production and natural gas liquids. The idea that we will become an exporter in later years occurs despite falling production, because “demand” will drop so much.
Are lower oil prices good news? Not really, if it means the world is sinking into recession.
We know from recent past experience and from common sense that higher oil prices are a drag on oil importing economies, because if more $$$ are spent on the same amount of oil, there is less to spend on discretionary goods and services. In addition, oil money sent to oil exporting countries is likely to be spent within those economies, rather than being reinvested in the oil importing country that the funds came from.
Figure 1. A rough calculation of expenditure (in 2011$) associated with oil imports or exports, based on 2012 BP Statistical Review data, for three areas of the world: the Former Soviet Union (FSU), the sum of EU-27, United States, and Japan, and the Remainder of the World. (Negative values are revenue from exports.)
A rough calculation based on 2012 BP Statistical Review data indicates that the combination of the EU-27, the United States, and Japan spent a little over $1 trillion dollars in oil imports in 2011–roughly the same amount as in 2008. Governments have been running up huge deficits and have been keeping interest rates very low to cover up this damage, but it is hard to make this strategy work. The deficit soon becomes unmanageable, as the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) countries in Europe have recently been recently been discovering. The US government is facing automatic spending cuts, as of January 2, 2013, because of its continuing deficits.
Furthermore, lower interest rates aren’t entirely beneficial. With low interest rates, pension funds need much larger employer contributions, if they are to make good on their promises. Retirees who depend on interest income to supplement their Social Security checks find themselves with less income. The lower interest rates don’t necessarily have a huge stimulatory impact on the economy, either, if buyers don’t have sufficient discretionary income to buy the additional services that new investment might provide.
Below the fold, we will discuss what is really happening with oil prices, and consider reasons why lower oil prices may be a signal that the world is again headed for deep recession.
Figure 1 shows the huge increase in world energy consumption that has taken place in roughly the last 200 years. This rise in energy consumption is primarily from increased fossil fuel use.
With energy consumption rising as rapidly as shown in Figure 1, it is hard to see what is happening when viewed at the level of the individual. To get a different view, Figure 2 shows average consumption per person, using world population estimates by Angus Maddison.
On a per capita basis, there is a huge spurt of growth between World War II and 1970. There is also a small spurt about the time of World War I, and a new spurt in growth recently, as a result of growing coal usage in Asia.
In this post, I provide additional charts showing long-term changes in energy supply, together with some observations regarding implications. One such implication is how economists can be misled by past patterns, if they do not realize that past patterns reflect very different energy growth patterns than we will likely see in the future.
Posted by Gail the Actuary on March 7, 2012 - 10:25am
Tags: brent, europe, eurozone, high oil prices, imported oil, oil prices, recession, west texas intermediate, wti [list all tags]
The world is presently sharing a limited supply of oil. When oil prices rise, oil production doesn’t rise very much, if at all.
The issues then become: Which buyers get the oil? What uses get priced out of the market? Which countries are disproportionately affected?
It seems to me that this time around, Europe, and in particular the Eurozone, is the area of the world getting hit the hardest by high oil prices. Part of this has to do with the relative level of the Euro and the US dollar. If we look at the price of Brent oil (a European oil) in Euros (Figure 2), we find that prices are as high now as they were in mid-2008.
This is the fifth post in the series following the oil price, markets and general health of the global economy, examining the simple theory that OECD recession may result from annual average oil price exceeding $100 / bbl.
The annual average price (AAP) of Brent went through $100 on around 16th August 2011 and the AAP stood at $108 on 22nd November. The AAP high point in the 2008 price spike was $104.8 on 9th October that year, and so $108 expensive dollars sets a new record. This is a short post updating readers with developments including speculation about why a weak world economy can now sustain record high oil prices.
Figure 1 Data for Brent from the EIA, 1 year moving average roughly equals 5 trading days per week divided by 7 days per week = 261 days. FTSE 100 data from Yahoo. Back in 2007 – 09, the top of the London FTSE 100 index was 6731 on 12th October 2007 (1). The top of the oil price spike was $143.95 on 3rd July 2008, 8 months after the market top (2). Both oil price and markets had declined substantially by the time the Lehman induced crash came in October 2008. The recent high in the FTSE 100 was 6091 on 8th February 2011 (3). The top of the recent oil price spike was $126.64 on 2nd May 2011, 3 months after the market top (4). Data at 22nd November.
I recently attended the annual ASPO conference in Washington, D.C. This was only my 2nd ASPO conference; the other one I attended was in 2008 in Sacramento. There were many familiar faces, some of whom I had previously met and some I only knew by reputation. The mood seemed remarkably calmer than in 2008. That year, oil prices were just coming down from record highs, a pair of hurricanes were causing spot gasoline shortages, and the economy was headed into the toilet. The general mood was that things were rapidly unraveling. Three years later, the long-term outlook isn’t really any different, but I think some who predicted imminent doom are starting to change their views on how things are going to play out.
I noted during one of my talks that I don’t even like the term “peak oil.” That is because there are a number of misconceptions and negative connotations associated with it. I prefer to talk in terms of resource depletion and a supply/demand imbalance that includes multiple elements – all of which combine to keep upward pressure on oil prices. So what are those misconceptions about peak oil? Below are the ones I think are most common.
It looks to me as though 2012 is likely to be a truly awful financial year, with several crises converging:
- Either very high oil prices or recession,
- The US governmental debt limit crisis,
- The Euro crisis,
- The Chinese debt problem,
- Debt deleveraging in the US and elsewhere,
- Further MENA (Middle East/North Africa) political problems, and
- Conflict between need for greater resources and pollution issues.
It seems to me that we may be reaching “Limits to Growth,” as foretold in the book by the same name in 1972. The book modeled the consequences of a rapidly growing world population and finite resource supplies. A wide range of scenarios was tested, but the result in nearly all scenarios was overshoot and collapse, with the timing of collapse typically being in the 2010 to 2075 time period.
The authors of Limits to Growth did not model the full interactions of the system. One element omitted was how debt would impact the system. Another item omitted was how prices for oil and other resources would affect the system.
If a person follows through the expected effects of high oil prices and debt, the financial system would appear to be the most vulnerable part of the system. The financial system would also appear to be what telegraphs problems from one part of the system to another. Unless a solution is found, failure of the financial system could ultimately bring down the whole system.
The issues we are confronted with today seem to be a subset of the issues foretold in the book Limits to Growth back in 1972. At some point, the economy cannot continue to grow as rapidly as it did in the past. It appears to me that the most immediate limit we are hitting today is inadequate low-priced oil, but there are other limits lurking not far away–inadequate fresh water and excessive pollution, for example. When the economy cannot grow as fast, or actually starts declining, recession sets in. Governments start having debt problems. Financial markets start behaving strangely.
This issue is a difficult one to talk about, because there really is no good solution. I have talked to a couple of groups recently (one a church group; one a peak oil group), about this issue. This is a copy of the presentation I used (Bumping up against the Growth Ceiling (PDF) or Bumping up against the Growth Ceiling (PowerPoint). In this post, I will discuss my presentation, omitting the section at the end called, "Where do we go from here?" The full post and discussion can be read at Our Finite World.
The economy is closely linked with the physical resources that underly it. Most economists assume debt can rise endlessly, just as they assume GDP can rise endlessly. But if there really is a limit that prevents oil supply from rising endlessly, it seems to me that there is also a corresponding limit that prevents debt from rising endlessly.
As I analyze the situation, it seems to me that here is really a two-way link between peak oil and peak debt:
1. Peak oil tends to cause peak debt. Some will argue with me about this, because they believe it is possible to decouple economic growth from energy growth, and in particular oil growth. As far as I am concerned, though, this decoupling is simply an unproven hypothesis–the normal connection is that a flattening or decline in energy supply causes a slowdown or actual decline in economic growth, and this slowdown causes a shift from an increase in the amount of debt, to a decrease in the amount of debt, as it did for US non-governmental loans in 2009 and 2010 (Figure 1).
Governments try to step in and keep the growth rate in debt up, but the gap is too great for them to make up. This tendency of governments to take on new debt (together with problems related to the original slowdown in economic growth) are reasons many governments have been getting into financial difficulty recently, in my view.
2. Once debt growth peaks (shifts from growth to decline), we can expect a feed-back loop that will tend to make the peak oil decline even worse than it would otherwise be.
In the current post, called "Part 1", I will cover the first of these two issues; I will cover the second issue in Part 2.