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World GDP in current US dollars seems to have peaked; this is a problem

August 15, 2017

World GDP in current US dollars seems to have peaked; this is a problem

World GDP in current US dollars is in some sense the simplest world GDP calculation that a person might make. It is calculated by taking the GDP for each year for each country in the local currency (for example, yen) and converting these GDP amounts to US dollars using the then-current relativity between the local currency and the US dollar.

To get a world total, all a person needs to do is add together the GDP amounts for all of the individual countries. There is no inflation adjustment, so comparing GDP growth amounts calculated on this basis gives an indication regarding how the world economy is growing, inclusive of inflation. Calculation of GDP on this basis is also inclusive of changes in relativities to the US dollar.

What has been concerning for the last couple of years is that World GDP on this basis is no longer growing robustly. In fact, it may even have started shrinking, with 2014 being the peak year. Figure 1 shows world GDP on a current US dollar basis, in a chart produced by the World Bank.

Figure 1. World GDP in “Current US Dollars,” in chart from World Bank website.

Since the concept of GDP in current US dollars is not a topic that most of us are very familiar with, this post, in part, is an exploration of how GDP and inflation calculations on this basis fit in with other concepts we are more familiar with.

As I look at the data, it becomes clear that the reason for the downturn in Current US$ GDP is very much related to topics that I have been writing about. In particular, it is related to the fall in oil prices since mid-2014 and to the problems that oil producers have been having since that time, earning too little profit on the oil they sell.

…click on the above link to read the rest of the article…

Debt: The Key Factor Connecting Energy and the Economy

May 2, 2016

Debt: The Key Factor Connecting Energy and the Economy

There are many who believe that the use of energy is critical to the growth of the economy. In fact, I am among these people. The thing that is not as apparent is that growth in energy consumption is dependent on the growth of debt. Both energy and debt have characteristics that are close to “magic,” with respect to the growth of the economy. Economic growth can only take place when growing debt (or a very close substitute, such as company stock) is available to enable the use of energy products.

The reason why debt is important is because energy products enable the creation of many kinds of capital goods, and these goods are often bought with debt. Commercial examples would include metal tools, factories, refineries, pipelines, electricity generation plants, electricity transmission lines, schools, hospitals, roads, gold coins, and commercial vehicles. Consumers also benefit because energy products allow the production of houses and apartments, automobiles, busses, and passenger trains. In a sense, the creation of these capital goods is one form of “energy profit” that is obtained from the consumption of energy.

The reason debt is needed is because while energy products can indeed produce a large “energy profit,” this energy profit is spread over many years in the future. In order to actually be able to obtain the benefit of this energy profit in a timeframe where the economy can use it, the financial system needs to bring forward  some or all of the energy profit to an earlier timeframe. It is only when businesses can do this, that they have money to pay workers. This time shifting also allows businesses to earn a financial profit themselves. Governments indirectly benefit as well, because they can then tax the higher wages of workers and businesses, so that  governmental services can be provided, including paved roads and good schools.

…click on the above link to read the rest of the article…

We are at Peak Oil now; we need very low-cost energy to fix it

December 22, 2015

We are at Peak Oil now; we need very low-cost energy to fix it

This past week, I gave a presentation to a group interested in a particular type of renewable energy–solar energy that is deployed in space, so it would provide electricity 24 hours per day. Their question was: how low does the production cost of electricity really need to be?

I gave them this two-fold answer:

1. We are hitting something similar to “Peak Oil” right now. The symptoms are the opposite of the ones that most people expected. There is a glut of supply, and prices are far below the cost of production. Many commodities besides oil are affected; these include natural gas, coal, iron ore, many metals, and many types of food. Our concern should be that low prices will bring down production, quite possibly for many commodities simultaneously. Perhaps the problem should be called “Limits to Growth,” rather than “Peak Oil,” because it is a different type of problem than most people expected.

2. The only theoretical solution would be to create a huge supply of renewable energy that would work in today’s devices. It would need to be cheap to produce and be available in the immediate future. Electricity would need to be produced for no more than four cents per kWh, and liquid fuels would need to be produced for less than $20 per barrel of oil equivalent. The low cost would need to be the result of very sparing use of resources, rather than the result of government subsidies.

Of course, we have many other problems associated with a finite world, including rising population, water limits, and climate change. For this reason, even a huge supply of very cheap renewable energy would not be a permanent solution.

This is a link to the presentation: Energy Economics Outlook. I will not attempt to explain the slides in detail.

…click on the above link to read the rest of the article…

Economic growth: How it works; how it fails; why wealth disparity occurs

December 8, 2015

Economic growth: How it works; how it fails; why wealth disparity occurs

Economists have put together models of how an economy works, but these models were developed years ago, when the world economy was far from limits. These models may have been reasonably adequate when they were developed, but there is increasing evidence that they don’t work in an economy that is reaching limits. For example, my most recent post, “Why ‘supply and demand’ doesn’t work for oil,” showed that when the world is facing the rising cost of oil extraction, “supply and demand” doesn’t work in the expected way.

In order to figure out what really does happen, we need to consider findings from a variety of different fields, including biology, physics, systems analysis, finance, and the study of past economic collapses. Since I started studying the situation in 2005, I have had the privilege of meeting many people who work in areas related to this problem.

My own background is in mathematics and actuarial science. Actuarial projections, such as those that underlying pensions and long term care policies, are one place where historical assumptions are not likely to be accurate, if an economy is reaching limits. Because of this connection to actuarial work, I have a particular interest in the problem.

How Other Species Grow 

We know that other species don’t amass wealth in the way humans do. However, the number of plants or animals of a given type can grow, at least within a range. Techniques that seem to be helpful for increasing the number of a given species include:

  • Natural selection. With natural selection, all species have more offspring than needed to reproduce the parent. A species is able to continuously adapt to the changing environment because the best-adapted offspring tend to live.

…click on the above link to read the rest of the article…

Oops! Low oil prices are related to a debt bubble

November 3, 2015

Oops! Low oil prices are related to a debt bubble

Why is the price of oil so low now? In fact, why are all commodity prices so low? I see the problem as being an affordability issue that has been hidden by a growing debt bubble. As this debt bubble has expanded, it has kept the sales prices of commodities up with the cost of extraction (Figure 1), even though wages have not been rising as fast as commodity prices since about the year 2000. Now many countries are cutting back on the rate of debt growth because debt/GDP ratios are becoming unreasonably high, and because the productivity of additional debt is falling.

If wages are stagnating, and debt is not growing very rapidly, the price of commodities tends to fall back to what is affordable by consumers. This is the problem we are experiencing now (Figure 1). 

Figure 1. Author's illustration of problem we are now encountering.

I will explain the situation more fully in the form of a presentation. It can be downloaded in PDF form: Oops! The world economy depends on an energy-related debt bubble. Let’s start with the first slide, after the title slide.

Slide 2

Growth is incredibly important to the economy (Slide 2). If the economy is growing, we keep needing to build more buildings, vehicles, and roads, leading to more jobs. Existing businesses find demand for their products rising. Because of this rising demand, profits of many businesses can be expected to rise over time, thanks to economies of scale.

Something that is not as obvious is that a growing economy enables much greater use of debt than would otherwise be the case. When an economy is growing, as illustrated by the ever-increasing sizes of circles, it is possible to “borrow from the future.”

…click on the above link to read the rest of the article…

 

Nine Reasons Why Low Oil Prices May “Morph” Into Something Much Worse

July 23, 2015

Nine Reasons Why Low Oil Prices May “Morph” Into Something Much Worse

Why are commodity prices, including oil prices, lagging? Ultimately, it comes back to the question, “Why isn’t the world economy making very many of the end products that use these commodities?” If workers were getting rich enough to buy new homes and cars, demand for these products would be raising the prices of commodities used to build and operate cars, including the price of oil. If governments were rich enough to build an increasing number of roads and more public housing, there would be demand for the commodities used to build roads and public housing.

It looks to me as though we are heading into a deflationary depression, because prices of commodities are falling below the cost of extraction. We need rapidly rising wages and debt if commodity prices are to rise back to 2011 levels or higher. This isn’t happening. Instead, Janet Yellen is talking about raising interest rates later this year, and  we are seeing commodity prices fall further and further. Let me explain some pieces of what is happening.

1. We have been forcing economic growth upward since 1981 through the use of falling interest rates. Interest rates are now so low that it is hard to force rates down further, to encourage further economic growth. 

Falling interest rates are hugely beneficial for the economy. If interest rates stop dropping, or worse yet, begin to rise, we will lose this very beneficial factor affecting the economy. The economy will tend to grow even less quickly, bringing down commodity prices further. The world economy may even start contracting, as it heads into a deflationary depression.

If we look at 10-year US treasury interest rates, there has been a steep fall in rates since 1981.

Figure 1. Chart prepared by St. Louis Fed using data through July 20, 2015.

…click on the above link to read the rest of the article…

 

What Greece, Cyprus, and Puerto Rico Have in Common

July 9, 2015

What Greece, Cyprus, and Puerto Rico Have in Common

We all know one thing that Greece, Cyprus, and Puerto Rico have in common–severe financial problems. There is something else that they have in common–a high proportion of their energy use is from oil. Figure 1 shows the ratio of oil use to energy use for selected European countries in 2006.

Figure 1. Oil as a percentage of total energy consumption in 20006, based on June 2015 Energy Information data.

Greece and Cyprus are at the bottom of this chart. The other “PIIGS” countries (Ireland, Spain, Italy, and Portugal) are immediately above Greece. Puerto Rico is not European so is not on Figure 1, but it if were shown on this chart, it would between Greece and Cyprus–its oil as a percentage of its energy consumption was 98.4% in 2006. The year 2006 was chosen because it was before the big crash of 2008. The percentages are bit lower now, but the relationship is very similar now.

Why would high oil consumption as a percentage of total energy be a problem for countries? The issue, as I see it, is competitiveness (or lack thereof) in the world marketplace. Years ago, say back in the early 1900s, when countries built up their infrastructure, oil price was much lower than today–less than $20 a barrel (even in inflation-adjusted dollars). Between 1985 and 2000 there was another period when prices were below $40 barrel. Back then, the price of oil was not too different from the price of other types of energy, so an energy mix slanted toward oil was not a problem.

Figure 2. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.

Oil prices are now in the $60 barrel range. This is still high by historical standards. Furthermore, much of the financial difficulty countries have gotten into has occurred in the recent past, when oil prices were in the $100 per barrel range.

While countries with a large share of oil in their energy mix tend to fare poorly, at least some countries with a preponderance of cheap energy fuels in their energy mix have tended to do very well. For example, China’s economy has grown rapidly in recent years. In 2006, its share of oil in its energy mix was only 23.0%, putting it below Norway but above Poland, if it were included in Figure 1.

…click on the above link to read the rest of the article…

Why EIA, IEA, and BP Oil Forecasts are Too High

June 9, 2015

Why EIA, IEA, and BP Oil Forecasts are Too High

When forecasting how much oil will be available in future years, a standard approach seems to be the following:

  1. Figure out how much GDP growth the researcher hopes to have in the future.
  2. “Work backward” to see how much oil is needed, based on how much oil was used for a given level of GDP in the past. Adjust this amount for hoped-for efficiency gains and transfers to other fuel uses.
  3. Verify that there is actually enough oil available to support this level of growth in oil consumption.

In fact, this seems to be the approach used by most forecasting agencies, including EIA, IEA and BP. It seems to me that this approach has a fundamental flaw. It doesn’t consider the possibility of continued low oil prices and the impact that these low oil prices are likely to have on future oil production. Hoped-for future GDP growth may not be possible if oil prices, as well as other commodity prices, remain low.

Future Oil Resources Seem to Be More Than Adequate

It is easy to get the idea that we have a great deal of oil resources in the ground. For example, if we start with BP Statistical Review of World Energy, we see that reported oil reserves at the end of 2013 were 1,687.9 billion barrels. This corresponds to 53.3 years of oil production at 2013 production levels.

If we look at the United States Geological Services 2012 report for one big grouping–undiscovered conventional oil resources for the world excluding the United States, we get a “mean” estimate of 565 billion barrels. This corresponds to another 17.8 years of production at the 2013 level of oil production.

…click on the above link to read the rest of the article…

 

Cuba: Figuring Out Pieces of the Puzzle

May 27, 2015

Cuba: Figuring Out Pieces of the Puzzle

Cuba is an unusual country for quite a few reasons:

  • The United States has had an embargo against Cuba since 1960, but there has recently been an announcement that the US will begin to normalize diplomatic relations.
  • The leader of Cuba between 1959 and 2008 was Fidel Castro. Fidel Castro is a controversial figure, with some viewing him is a dictator who nationalized property of foreign citizens without compensation. Citizens of Cuba seem to view him as more of as a Robin Hood figure, who helped the poor by bringing healthcare and education to all, equalizing wages, and building many concrete block homes for people who had only lived in shacks previously.
  • If we compare Cuba to its nearest neighbors Haiti and Dominican Republic (both of which were also former sugar growing colonies of European countries), we find that Cuba is doing substantially better than the other two. In per capita CPI in Purchasing Power Parity, in 2011, Cuba’s average was $18,796, while Haiti’s was $1,578, and the Dominican Republic was $11,263. In terms of the Human Development Index (which measures such things as life expectancy and literacy), in 2013, Cuba received a rating of .815, which is considered “very high”. Dominican Republic received a rating of .700, which is considered “High.” Haiti received a rating of .471, which is considered “Low.”
  • Cuba is known for its permaculture programs (a form of organic gardening), which helped increase Cuba’s production of fruit and vegetables in the 1990s and early 2000s.
  • In spite of all of these apparently good outcomes of Cuba’s experimentation with equal sharing of wealth, in recent years Cuba seems to be moving away from the planned economy model. Instead, it is moving to more of a “mixed economy,” with more entrepreneurship encouraged.

 

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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