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Angolan oil will peak in 2016, IMF says – International | IOL Business | IOL.co.za

Angolan oil will peak in 2016, IMF says – International | IOL Business | IOL.co.za.

March 25 2014 at 08:00am
By Colin McClelland


br angolaBloomberg

A construction crane stands above a building site near the shoreline in Luanda. Angola’s crude oil output will decline from 2017 unless new fields are found, so it must make stronger efforts to diversify its sources of revenue, the International Monetary Fund advises. Photo: Bloomberg

Luanda – Economic growth in Angola will slow in 2017 as oil output declines, according to the International Monetary Fund (IMF).

The economy is forecast to expand by 5.3 percent this year, and by 5.5 percent and 5.9 percent in the following two years before the rate slows to 3.3 percent in 2017, IMF figures show.

Crude oil production in Africa’s second-largest producer is set to decline to 1.77 million barrels a day in 2017 from 1.9 million barrels a day in 2016.

“This reflects the expectation that oil production from currently known reserves will peak and then start to fall,” Nicholas Staines, the IMF representative in Angola, said last week.

“The timing of this turnaround could well be pushed back as new reserves are discovered.”

Angola produced 1.69 million barrels of oil a day last month. The country is attempting to diversify its economy away from oil, which accounts for about 80 percent of tax revenue and 45 percent of gross domestic product (GDP).

The government is targeting $4 billion (R43.5bn) a year in foreign investment in areas including mining, agriculture, transport and hotels, but so far it has attracted about half of that amount.

The IMF forecasts economic growth of 6.4 percent this year in non-oil industries as the country boosts spending on infrastructure.

Growth excluding crude oil may reach 6.7 percent next year, followed by 7.1 percent in 2016 and 7.7 percent the year after, IMF data show.

The diversification effort “is behind expectations and a stronger effort is clearly needed”, Staines said.

“This is particularly important in the context of higher government spending, softening oil revenue projections and, now, fiscal deficits.”

IMF forecasts for non-oil growth were lower than the government’s because the bank saw potential difficulties in large capital projects and was more cautious about their spillover effects, Staines said.

For 2015 to 2017, the government forecasts 10.3 percent non-oil growth in GDP, while the IMF projects 7.2 percent.

The government had a budget deficit of 1.5 percent of GDP last year – the first since 2009, when the IMF began a $1.4bn loan programme to help Angola weather an oil price drop. This year’s budget deficit is expected to reach 2 percent and the fiscal balance will not be in surplus until 2019, the IMF believes.

The IMF expressed disappointment over the government’s inaccurate reporting of data on domestic arrears during 2010 and accounts payable the following year, which breached the terms of the loan agreement. The fund said it also regretted continued weaknesses in public financial management and called for decisive efforts to address arrears.

Angola “is very committed to address these difficulties” and passed legislation last year to improve arrears accounting and to give more oversight to the finance ministry, Staines said.

Domestic arrears should not have an effect on plans by the government to issue a $1.5bn eurobond in the third quarter.

“The international financial environment is currently difficult and perhaps not the best of times for Angola to consider a eurobond issue,” Staines said. “The government will presumably seek the advice of its capital market advisers to get a sense of the right timing.”

Economic growth probably slowed to 4.1 percent last year from 5.2 percent in 2012 as a drought slowed agricultural expansion, the IMF said.

“Addressing capital infrastructure constraints in transport, water and electricity will go a long way and should have positive spillover effects on the economy,” Staines said. “But the full benefits will require a much stronger effort to address the structural constraints summarised in Angola’s very low ranking in the World Bank’s cost of doing business index.”

The index ranks Angola 179th of 189 countries benchmarked to June last year.

Angola is estimated to have recoverable oil reserves of 12.7 billion barrels, according to the BP Statistical Review of World Energy published in June.

Drillers including Statoil and ConocoPhillips are testing the Atlantic mirror theory and plan to spend $3bn on more than 32 wells this year in Angola’s largest exploration campaign.

They are searching for structures similar to those off Brazil, where Petrobras is developing the western hemisphere’s largest oil find in three decades, estimated at 20 billion barrels. – Bloomberg

Revisiting the IEA's World Energy Outlook 2013 » Peak Oil BarrelPeak Oil Barrel

Revisiting the IEA’s World Energy Outlook 2013 » Peak Oil BarrelPeak Oil Barrel.

I was going over the IEA’s World Energy Outlook 2013 and noticed a few things you might find interesting. Exactly what is their opinion on Peak Oil? Here, cut and pasted from the report.

IEA 2

Got that? The URR is great enough to delay any peak until after 2035. Here is one of their graphs that indicate how much they think is left, coal, gas and oil.

IEA 1

Okay 54 years of proven reserves. That puts the peak out to well past mid century. Likely well past 2100 if you count those remaining recoverable resources. And just who has all this oil?

IEA 10

2.2 trillion barrels of conventional crude oil resources. However only 1.7 trillion barrels of that has a 90% probability of being recoverable. Of this the Middle East has the lions share, 971 billion barrels of resources with a 90% probability of recovering 813 billion barrels of that.

 

The Middle East, of course, mostly OPEC. And if you count the four OPEC countries of Africa and the two in South America, the vast majority of the world’s oil reserves are in OPEC nations. In fact OPEC claims 81% of all the proven reserves in the world.

OPEC Reserves

So with 81% of the world’s proven reserves what is the IEA expecting from OPEC in the future?

IEA 6
IEA 22

A word of explanation is needed here. New Policies Scenario: A scenario in the World Energy Outlook that takes account of broad policy commitments and plans that have been announced by countries, including national pledges to reduce greenhouse-gas emissions and plans to phase out fossil-energy subsidies, even if the measures to implement these commitments have yet to be identified or announced.

450 Scenario: A scenario presented in the World Energy Outlook that sets out an energy pathway consistent with the goal of limiting the global increase in temperature to 2°C by limiting concentration of greenhouse gases in the atmosphere to around 450 parts per million of CO2.

Current Policies is business as usual. Or, basically, we will keep on doing what we are doing. Which is of course exactly what will happen. However what the IEA sees as happening, above, is not exactly what will happen, far from it.

So, looking at Conventional Crude Oil Production in 2012, 2020 and 2035 we find this. All data on all charts below are in million barrels per day:

IEA 23

Well hell, OPEC production will be lower in 2020 than it is today. And non OPEC production will be lower in 2035 than it is today. But not to worry, total conventional crude production will be up 2.9 percent in the 23 years between 2012 and 2035.

But they are expecting Natural Gas Liquids to increase by almost 57 percent.

IEA 24

And let us not forget about Unconventionals. What are Unconventionals?

IEA 26

IEA 25

Unconventionals, Light Tight Oil and Oil Sands increase from 5 mb/d to 10.6 mb/d in 2020 to 17.1 mb/d in 2035. That is an increase of 242 percent in 23 years.

 Note: If you would like to be added to my email notification list when a new post is posted please email me at DarwinianOne at Gmail.com.

What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors | Zero Hedge

What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors | Zero Hedge.

Curious what the real, and not pre-spun for public consumption, sentiment on the ground is in a China (where the housing bubble has already popped and the severe contraction in credit is forcing the ultra wealthy to luxury real estate in places like Hong Kong) from the perspective of the common man? The photo below, which shows hundreds of people rushing today to withdraw money from branches of two small Chinese banks after rumors spread about solvency at one of them, are sufficiently informative about just how jittery ordinary Chinese have become in recent days, and reflect the growing anxiety among investors as regulators signal greater tolerance for credit defaults.

Reuters explains:

Domestic media reported, and a local official confirmed, that ordinary depositors swarmed a branch of Jiangsu Sheyang Rural Commercial Bank in Yancheng in economically troubled Jiangsu province on Monday. The semi-official China News Service quoted the bank’s chairman, Zang Zhengzhi, as saying it would ensure payments to all the depositors. The report did not say how the rumour originated.

Chen Dequn, a resident in Yandong, just outside Yancheng, said she saw a crowd of about 70 to 80 people gathering in a branch of Sheyang Rural Commercial Bank in her town on Tuesday.

“At the moment there are about 70 or 80 people in there. Normally there’d only be about 10,” she told Reuters by telephone.

Officials at another small bank, Rural Commercial Bank of Huanghai, said they had faced similar rushes by depositors, triggered by rumours of insolvency at Sheyang. “We will be holding an emergency meeting tonight,” an official at the bank’s administration office told Reuters, but declined to comment further.

Why Yancheng investors suddenly lost confidence in the security of their bank deposits is not clear, given that the Sheyang bank is subject to formal reserve requirements, loan-to-deposit ratios and other rules to ensure it keeps sufficient cash on hand to meet demand.

Why the jitteriness? Because until now, bank failures in China have been unknown, as Chinese banks are considered to operate under an implicit guarantee from the government. That is changing. Which is why the rumor mill is on overdrive:

“It’s true that these rumours exist, but actually (the bank going bankrupt) is impossible. It’s a completely different situation from the problem with the cooperatives,” said Zhang Chaoyang, an official at the propaganda department of the Communist Party committee in Tinghu district, where the bank branch is located.

And Bear Stearns is fine…

Zhang was referring to an incident that rattled depositors in Yancheng in January, when some rural cooperatives — which are not subject to the supervision of the bank regulator — ran out of cash and locked their doors. Local officials say several co-op bosses fled after committing fraud.

China’s central bank governor said this month that deposit rates are likely to liberalised in one to two years – the most explicit timeframe to date for what would be the final step in freeing up banks to set their own interest rates.

It is widely expected to introduce a deposit insurance scheme before freeing up deposit rates, to protect savers in case a liberalised market puts major strains on smaller banks and alarms the public. Analysts also expect the controls on deposit rates to be lifted gradually. Is China’s debt nightmare a province called Jiangsu?

Why are bank runs like these only set to accelerate? Simple – unlike the US China has zero deposit insurance. Reuters expplains:

The case highlights the urgency of plans to put in place a deposit insurance system to protect investors against bank insolvency, as Chinese grow increasingly nervous about the impact of slowing economic growth on financial institutions.

Regulators have said they will roll out deposit insurance as soon as possible, without giving a firm deadline.

In the meantime, there are always helpful investor relations people willing to explain calmly just what is going on:

When contacted by Reuters by phone on Tuesday, an official at the Jiangsu Sheyang Rural Commercial Bank branch hung up, saying she was busy.

Others were even more helpful:

An official at the administrative office at Jiangsu Sheyang Rural Commercial Bank said the bank would publish a statement shortly. On its website, the bank says it is capitalised at 525 million yuan and had total deposits of 12 billion yuan as of end-February,

Officials at the Jiangsu branch offices of the China Banking Regulatory Commission (CBRC) declined to comment. The Yancheng branch of CBRC and the propaganda offices in Yancheng city and Sheyang county did not answer calls seeking comment.

Busy or not, for now, the banks may have survived following yet more capital infusions from the local government, but what happens when the default wave that has claimed solar, coal, and real estate developers finally impacts a deposit-holding institution? How will China – which has far more total deposits within its banking system than in the US (since the US banks fund themselves mostly using ultra-short term, overnight shadow funding) – survive a nationwide bank run we wonder?

Climate Change and Human Extinction – A Personal Perspective  |  Peak Oil News and Message Boards

Climate Change and Human Extinction – A Personal Perspective  |  Peak Oil News and Message Boards.

“Just one source, methane from the arctic…leads us [by 2030] to…a temperature beyond which humans have never existed on the planet.” Guy McPherson, professor emeritus of University of Arizona in Environmental Studies, shares highlights from his compilation of recent reports on climate change effects. Their number and extent have grown exponentially since he began five years ago. In this interview, he shares his personal journey through despair and deep grief to recent acceptance. “I suspect we get to see the end of this movie… Nobody else in human history [has]… We get to see how humans act in the face of their own demise.” Episode 262. [guymcpherson.com] Watch Guy’s Climate Change presentation February 2014

Climate Change and Human Extinction – A Personal Perspective  |  Peak Oil News and Message Boards

Climate Change and Human Extinction – A Personal Perspective  |  Peak Oil News and Message Boards.

“Just one source, methane from the arctic…leads us [by 2030] to…a temperature beyond which humans have never existed on the planet.” Guy McPherson, professor emeritus of University of Arizona in Environmental Studies, shares highlights from his compilation of recent reports on climate change effects. Their number and extent have grown exponentially since he began five years ago. In this interview, he shares his personal journey through despair and deep grief to recent acceptance. “I suspect we get to see the end of this movie… Nobody else in human history [has]… We get to see how humans act in the face of their own demise.” Episode 262. [guymcpherson.com] Watch Guy’s Climate Change presentation February 2014

Why peak oil signals the world’s end, or at least the one we know – Zawya

Why peak oil signals the world’s end, or at least the one we know – Zawya.

By Joel Guglietta

While global financial markets are still levitating somewhere between the stratosphere and the Kingdom of Asgard, by 60°24′31″ North and 172°43′12″ West, in the middle of nowhere, an isolated island of 137.857 sq-mi holds the key of three major economic developments and risks:

  1. November 2013, Lawrence Summers raised the question whether the “secular stagnation” and the impossibility for the US and other major economies to grow without the help of recurring bubbles was not doomed to become the “new normal”.
  2. March 2014, the Conference Board released a study (figure 1) showing the falling trend in global total factor productivity, i.e. in the share of output not explained by the “accumulation of factors” (more on this economic jargon below).
  3. March 2014 again, the NASA published a research paper answering to “widespread concerns that current trends in resource-used are unsustainable, but possibilities of overshoot/collapse remain controversial”. This study tells us that, based on a well-known prey-predator model to which they add “wealth and economic inequality”, a total collapse is “very difficult to avoid” (figure 2).

w
Source: The Conference Board, January 2014

3
Source: NASA, 2014

1. – The tragic fate of the fat caribou, or why we have to fear the reindeer of St Matthew more than the wolves of Wall-Street

During World War II, the US Coast Guard decided to install long range aids to navigation in St Matthew Island, a remote rock in the Bering Sea in Alaska, and to stock emergency food source there. In August the same year, they released 29 reindeer (known as caribou in North America) on the island as a backup food source for the 19 men stationed there. As World War II drew to an end, the Coast Guard left the island and, by the same token, the population of reindeer growing unchecked as their only predators, the 19 men on duty there, were sent back home. It followed a dramatic boom & burst of population dynamics (figure 1). From 1944 to 1966 the number of these herbivores, which did not have to worry anymore about any predator and ate all the available lichen, increased from 29 to 6,000. In 1957, their body weight was found to exceed that of reindeer in domestic herds by 24.5 percent among females and 46.6 percent among males. Then, the following winter, as they faced a limited food supply to sustain their number and their massive body weight, they underwent a crash die-off, the population falling from 6,000 to 42 (figure 3).

There is a lot of food for thought in this story. First, as the NASA study suggests, when one species (for example the top 1 oercent living in the Galapogos, another rock ,as I put it in a paper issued last year “Why Kings of Galapagos are long equity under (mild) Mugabenomics?”) thrive to the abject detriment of another one (the lichen, or the “bottom” 99%), bad things eventually happen.

2
Source: The Conference Board, TED, January 2014

1
Source: Manicore

Second, and more generally, the point of this story boils down to the mundane fact that resources are everything, and when they vanish, the transition from a given state to another one, namely from unchecked growth and exuberance to complete obliteration, is dramatic most often than not. This holds all the more true for the key resource, i.e. oil, which brings us to the second chapter of our tale.

2. – The peak-oil: a conspiracy theory or a mandatory mathematical truism?

Most of the discussions on oil hover around the question of “reserves”. I am going here to state the obvious but the key argument to keep in mind is that these reserves are meant for one and only purpose: oil production. ….woooh!, that’s new, next please! Okay, but bear with me. Till someone proves me I am wrong, I assume that the volume of Earth is finite, so that oil reserves are finite.Now, for a given stock of non-renewable resource, all production functions obey to the same law: they start from zero, grow to a maximum and decline to zero in a “bell-shape” way (figure 4). Now, the area under this curve is called the integral of the production function and it is strictly equal to the oil reserves. Because oil reserves are finite, the integral is necessarily convergent and because they are non-renewable the production function (the derivative function of the oil reserve) cannot have another form than a bell shape. You can stretch it, you can squeeze it, but the general form is this one and not any other. This is mathematical certainty like 2+2=4. The peak-oil is a mandatory mathematical truism, not a “conspiracy theory”.

Obviously, the key question is: the “peak-oil”, is it for now?

Well, running the risk of stating one obvious thing after another, I assume that we all agree that a compulsory task to perform before extracting oil from the ground is to find it. This has profound implications as this makes us certain that a peak is mandatory given the resource potential of the oil field. It also tells us that the higher the proven reserves and the bigger they are with respect to production, the closer the peak of oil production (remember: the integral is the area under the production curve). If I take the example of the United-States, as evidenced by King Hubbert, there is a 35-year lag between discovery and production (figure 5). If evidence proves Hubert peak was a bit bad on timing, possible production curves, based on the world ultimate reserves. i.e. total extractable petroleum, suggest that the peak is now.

4
Source: Laherrere, 2003

f
Source: Manicore

This is old story and, as the world still goes around, one could dismiss all this analysis. However, what is new is that business conditions are becoming more challenging for the oil majors as figure 7 suggests. Indeed since 2009, the capital expenditures of ExxonMobil, Royal Dutch Shell and Chevron have increased by 39-89 percent while their production has stalled. This is the balance-sheet-based proof that the peak-oil is happening now.

d
Source: Wall Street Journal

Now, the last point on the peak-oil, and this is key to understand the third and last chapter of our tale. We have to keep in mind that when we hear that we still have for 20 or 30 years of oil ahead of us it does not mean that we live the “good life” for the next 2 to 3 decades with constant consumption and then, the year after, we fall straight to zero consumption in a crash die-off as our reindeer herd experienced. Actually, consumption will be following the bell-shaped production function, it will be a slow death, and in the meanwhile, as the oil majors experience, the massive rise of capital expenditure will be weighting on the marginal energy return of energy. Indeed, according to Kopits, total upstream industry spendind since 2005 has been USD 4 trillion (about USD 2.5 trillion spent on legacy crude oil production), and legacy oil production has declined by 1 mmb/d since 2005. By comparison, between 1998 and 2005 the industry spent USD 1.5 trillion on upstream development and added 8.6 mmb/d to total crude production. This declining energy return in energy production, which is nothing but the by-product of declining/exhausting oil reserves and the very fact we are experiencing the peak-oil, drives the whole economy down.

Indeed, though we live in the age of the “information technology” it is worthwhile to remember that the information society is an energy ogre (not mentioning the globalisation mantra which gives a central role to the transport industry which consumes two-third of total oil). For example, according toASU engineer Eric Williams 227 to 270 kilograms (or 500 to 594 pounds) of carbon dioxide are emitted in manufacturing a laptop computer. Mark Mills , the CEO of the Digital Power Group, teaches us that a medium-size refrigerator will use about 322 kW-h a year whereas the average iPhone uses about 361 kW-h a year once the wireless connections, data usage and battery charging are tallied up.

3. – There is something deeply wrong about macro-economic theory

So how all this relates to the “secular stagnation” scenario and all the fall in total factor productivity. Well, this is where things get a little bit technical and where our tale comes (finally!) to an end.

Most economists are big fan of more or less complex equations designed to explain everything in a highly stylised fashion. In this quest, in order to explain the origin of economic growth, they use the so-called Cobb-Douglas production function which states that GDP (Y) is a function of technology (A), capital (K) and labour (L). More precisely, the Holy Grail equation takes this form: Y = A * Ka * Lb, with “a” and “b” the elasticity of production to capital and labour. Total factor productivity is for instance derived from this equation.

Now, as the purpose of this equation is to explain the origin of economic growth, let’s put ourselves in the shoes of the Neanderthals. While we are planning to go in the wild to bring back some proteins to the tribe, we look around us. We do find sturdy arms, sturdy legs and few well-functioning brains. In a word, we find “labour”. Do we find “capital”? A broad and outstanding No! However, as the time goes by, our species is evolving. We will find primal energy in the form of fire, and then, at a very latter stage fossil energy and we will understand how to use it. “Capital” will appear at a much latter stage based on accumulated labour (whatever it is “inspiration”, aka knowledge, or “transpiration”, aka sweat and hard work) and the use of energy around us.

The point is very simple: the central equation explaining economic growth is plain wrong and we need to transform it in order to make capital an inner feedback loop to the system as it is mentioned in the Report to the Club of Rome (2003) or suggested by Jean-Marc Jancovici . How to do this?

Well in order to make things simple, let’s assume that returns to scale are constant (if I multiply resources by 2, output will be increased by 2, which fares as a reasonable assumption) so that we get b = 1-a, and therefore Y = A * Ka * L1-a. Now, let’s make the capital K dependent on energy (E) and labor (L) (or accumulated labor, (integral of L), so that K = c * E * L (with “c” a constant and simply labour which does not change the qualitative properties of the model). Our equation becomes: Y = A * ba * Ea * L.

Add to this new equation a reasonable assumption about the dynamics of labour (I assume a logistic function for the dynamics of the population with a sharp increase followed by an asymptotic rise) and the knowledge we have gained over the shape of the oil production function and thus of the dynamics of how available reserves evolve, we can build a toy-model and easily simulate the path of the economy (figure 8) on an oil(energy)-dependent computer. This toy-model clearly shows how sensitive an economy can be to the downward shift in oil-production during and after the peak-oil.

Do not get me wrong here. I do not believe that the Stone Age ended because we were short of stones. My point comes down to say that we are smack in the middle of an energetic transition, that this transition has a much more profound current negative effect that many can believe and that the world as we know is coming to an end, evolving towards “something else”. The hope here is that, flawed economic models, lack of political will to manage this energetic transition or ideological foolishness from the Talibans of the “all-green” regarding the nuclear energy as “evil”, will not drive us toward the tragic fate of the reindeer herd of St Matthew Island and other unfortunate raging bulls (figure 9). Indeed, the NASA research suggests that high wealth inequality is sufficient to create a total collapse. Add inequality regarding access to energy, water and food (agriculture is oil-dependent too) on the top of that, and we have a Mad-Max-Moment ahead of us. In this state of urgency, do we attend a rise in global capex in renewable energy that could make us more optimistic? Well, unfortunately not. Global investment in renewable energy fell 11 percent in 2013 to USD 254 billion according to Bloomberg New energy Finance. This is the second decline in renewable investments since 2001. So, yes the crash die-off of our fat caribous is unfortunately still a scenario.

v
Source: Joel Guglietta

Joel Guglietta is Managing Director of OCTIS Asset Management in Singapore

Author Steen Jakobsen, Chief Economist & CIO, Saxo Bank
Saxo Bank provides an execution-only service. The material on this website does not contain (and should not be construed as containing) investment advice or an investment recommendation, or a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Saxo Bank accepts no responsibility for any use that may be made of these comments and for any consequences that result.

Why peak oil signals the world's end, or at least the one we know – Zawya

Why peak oil signals the world’s end, or at least the one we know – Zawya.

By Joel Guglietta

While global financial markets are still levitating somewhere between the stratosphere and the Kingdom of Asgard, by 60°24′31″ North and 172°43′12″ West, in the middle of nowhere, an isolated island of 137.857 sq-mi holds the key of three major economic developments and risks:

  1. November 2013, Lawrence Summers raised the question whether the “secular stagnation” and the impossibility for the US and other major economies to grow without the help of recurring bubbles was not doomed to become the “new normal”.
  2. March 2014, the Conference Board released a study (figure 1) showing the falling trend in global total factor productivity, i.e. in the share of output not explained by the “accumulation of factors” (more on this economic jargon below).
  3. March 2014 again, the NASA published a research paper answering to “widespread concerns that current trends in resource-used are unsustainable, but possibilities of overshoot/collapse remain controversial”. This study tells us that, based on a well-known prey-predator model to which they add “wealth and economic inequality”, a total collapse is “very difficult to avoid” (figure 2).

w
Source: The Conference Board, January 2014

3
Source: NASA, 2014

1. – The tragic fate of the fat caribou, or why we have to fear the reindeer of St Matthew more than the wolves of Wall-Street

During World War II, the US Coast Guard decided to install long range aids to navigation in St Matthew Island, a remote rock in the Bering Sea in Alaska, and to stock emergency food source there. In August the same year, they released 29 reindeer (known as caribou in North America) on the island as a backup food source for the 19 men stationed there. As World War II drew to an end, the Coast Guard left the island and, by the same token, the population of reindeer growing unchecked as their only predators, the 19 men on duty there, were sent back home. It followed a dramatic boom & burst of population dynamics (figure 1). From 1944 to 1966 the number of these herbivores, which did not have to worry anymore about any predator and ate all the available lichen, increased from 29 to 6,000. In 1957, their body weight was found to exceed that of reindeer in domestic herds by 24.5 percent among females and 46.6 percent among males. Then, the following winter, as they faced a limited food supply to sustain their number and their massive body weight, they underwent a crash die-off, the population falling from 6,000 to 42 (figure 3).

There is a lot of food for thought in this story. First, as the NASA study suggests, when one species (for example the top 1 oercent living in the Galapogos, another rock ,as I put it in a paper issued last year “Why Kings of Galapagos are long equity under (mild) Mugabenomics?”) thrive to the abject detriment of another one (the lichen, or the “bottom” 99%), bad things eventually happen.

2
Source: The Conference Board, TED, January 2014

1
Source: Manicore

Second, and more generally, the point of this story boils down to the mundane fact that resources are everything, and when they vanish, the transition from a given state to another one, namely from unchecked growth and exuberance to complete obliteration, is dramatic most often than not. This holds all the more true for the key resource, i.e. oil, which brings us to the second chapter of our tale.

2. – The peak-oil: a conspiracy theory or a mandatory mathematical truism?

Most of the discussions on oil hover around the question of “reserves”. I am going here to state the obvious but the key argument to keep in mind is that these reserves are meant for one and only purpose: oil production. ….woooh!, that’s new, next please! Okay, but bear with me. Till someone proves me I am wrong, I assume that the volume of Earth is finite, so that oil reserves are finite.Now, for a given stock of non-renewable resource, all production functions obey to the same law: they start from zero, grow to a maximum and decline to zero in a “bell-shape” way (figure 4). Now, the area under this curve is called the integral of the production function and it is strictly equal to the oil reserves. Because oil reserves are finite, the integral is necessarily convergent and because they are non-renewable the production function (the derivative function of the oil reserve) cannot have another form than a bell shape. You can stretch it, you can squeeze it, but the general form is this one and not any other. This is mathematical certainty like 2+2=4. The peak-oil is a mandatory mathematical truism, not a “conspiracy theory”.

Obviously, the key question is: the “peak-oil”, is it for now?

Well, running the risk of stating one obvious thing after another, I assume that we all agree that a compulsory task to perform before extracting oil from the ground is to find it. This has profound implications as this makes us certain that a peak is mandatory given the resource potential of the oil field. It also tells us that the higher the proven reserves and the bigger they are with respect to production, the closer the peak of oil production (remember: the integral is the area under the production curve). If I take the example of the United-States, as evidenced by King Hubbert, there is a 35-year lag between discovery and production (figure 5). If evidence proves Hubert peak was a bit bad on timing, possible production curves, based on the world ultimate reserves. i.e. total extractable petroleum, suggest that the peak is now.

4
Source: Laherrere, 2003

f
Source: Manicore

This is old story and, as the world still goes around, one could dismiss all this analysis. However, what is new is that business conditions are becoming more challenging for the oil majors as figure 7 suggests. Indeed since 2009, the capital expenditures of ExxonMobil, Royal Dutch Shell and Chevron have increased by 39-89 percent while their production has stalled. This is the balance-sheet-based proof that the peak-oil is happening now.

d
Source: Wall Street Journal

Now, the last point on the peak-oil, and this is key to understand the third and last chapter of our tale. We have to keep in mind that when we hear that we still have for 20 or 30 years of oil ahead of us it does not mean that we live the “good life” for the next 2 to 3 decades with constant consumption and then, the year after, we fall straight to zero consumption in a crash die-off as our reindeer herd experienced. Actually, consumption will be following the bell-shaped production function, it will be a slow death, and in the meanwhile, as the oil majors experience, the massive rise of capital expenditure will be weighting on the marginal energy return of energy. Indeed, according to Kopits, total upstream industry spendind since 2005 has been USD 4 trillion (about USD 2.5 trillion spent on legacy crude oil production), and legacy oil production has declined by 1 mmb/d since 2005. By comparison, between 1998 and 2005 the industry spent USD 1.5 trillion on upstream development and added 8.6 mmb/d to total crude production. This declining energy return in energy production, which is nothing but the by-product of declining/exhausting oil reserves and the very fact we are experiencing the peak-oil, drives the whole economy down.

Indeed, though we live in the age of the “information technology” it is worthwhile to remember that the information society is an energy ogre (not mentioning the globalisation mantra which gives a central role to the transport industry which consumes two-third of total oil). For example, according toASU engineer Eric Williams 227 to 270 kilograms (or 500 to 594 pounds) of carbon dioxide are emitted in manufacturing a laptop computer. Mark Mills , the CEO of the Digital Power Group, teaches us that a medium-size refrigerator will use about 322 kW-h a year whereas the average iPhone uses about 361 kW-h a year once the wireless connections, data usage and battery charging are tallied up.

3. – There is something deeply wrong about macro-economic theory

So how all this relates to the “secular stagnation” scenario and all the fall in total factor productivity. Well, this is where things get a little bit technical and where our tale comes (finally!) to an end.

Most economists are big fan of more or less complex equations designed to explain everything in a highly stylised fashion. In this quest, in order to explain the origin of economic growth, they use the so-called Cobb-Douglas production function which states that GDP (Y) is a function of technology (A), capital (K) and labour (L). More precisely, the Holy Grail equation takes this form: Y = A * Ka * Lb, with “a” and “b” the elasticity of production to capital and labour. Total factor productivity is for instance derived from this equation.

Now, as the purpose of this equation is to explain the origin of economic growth, let’s put ourselves in the shoes of the Neanderthals. While we are planning to go in the wild to bring back some proteins to the tribe, we look around us. We do find sturdy arms, sturdy legs and few well-functioning brains. In a word, we find “labour”. Do we find “capital”? A broad and outstanding No! However, as the time goes by, our species is evolving. We will find primal energy in the form of fire, and then, at a very latter stage fossil energy and we will understand how to use it. “Capital” will appear at a much latter stage based on accumulated labour (whatever it is “inspiration”, aka knowledge, or “transpiration”, aka sweat and hard work) and the use of energy around us.

The point is very simple: the central equation explaining economic growth is plain wrong and we need to transform it in order to make capital an inner feedback loop to the system as it is mentioned in the Report to the Club of Rome (2003) or suggested by Jean-Marc Jancovici . How to do this?

Well in order to make things simple, let’s assume that returns to scale are constant (if I multiply resources by 2, output will be increased by 2, which fares as a reasonable assumption) so that we get b = 1-a, and therefore Y = A * Ka * L1-a. Now, let’s make the capital K dependent on energy (E) and labor (L) (or accumulated labor, (integral of L), so that K = c * E * L (with “c” a constant and simply labour which does not change the qualitative properties of the model). Our equation becomes: Y = A * ba * Ea * L.

Add to this new equation a reasonable assumption about the dynamics of labour (I assume a logistic function for the dynamics of the population with a sharp increase followed by an asymptotic rise) and the knowledge we have gained over the shape of the oil production function and thus of the dynamics of how available reserves evolve, we can build a toy-model and easily simulate the path of the economy (figure 8) on an oil(energy)-dependent computer. This toy-model clearly shows how sensitive an economy can be to the downward shift in oil-production during and after the peak-oil.

Do not get me wrong here. I do not believe that the Stone Age ended because we were short of stones. My point comes down to say that we are smack in the middle of an energetic transition, that this transition has a much more profound current negative effect that many can believe and that the world as we know is coming to an end, evolving towards “something else”. The hope here is that, flawed economic models, lack of political will to manage this energetic transition or ideological foolishness from the Talibans of the “all-green” regarding the nuclear energy as “evil”, will not drive us toward the tragic fate of the reindeer herd of St Matthew Island and other unfortunate raging bulls (figure 9). Indeed, the NASA research suggests that high wealth inequality is sufficient to create a total collapse. Add inequality regarding access to energy, water and food (agriculture is oil-dependent too) on the top of that, and we have a Mad-Max-Moment ahead of us. In this state of urgency, do we attend a rise in global capex in renewable energy that could make us more optimistic? Well, unfortunately not. Global investment in renewable energy fell 11 percent in 2013 to USD 254 billion according to Bloomberg New energy Finance. This is the second decline in renewable investments since 2001. So, yes the crash die-off of our fat caribous is unfortunately still a scenario.

v
Source: Joel Guglietta

Joel Guglietta is Managing Director of OCTIS Asset Management in Singapore

Author Steen Jakobsen, Chief Economist & CIO, Saxo Bank
Saxo Bank provides an execution-only service. The material on this website does not contain (and should not be construed as containing) investment advice or an investment recommendation, or a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Saxo Bank accepts no responsibility for any use that may be made of these comments and for any consequences that result.

Survive Peak Oil: Peak Oil: Laherrère, Real Curves, and Official Curves

Survive Peak Oil: Peak Oil: Laherrère, Real Curves, and Official Curves.

Sunday, March 23, 2014

Peak Oil: Laherrère, Real Curves, and Official Curves

The graph above is Figure 11 from Jean Laherrère, “World Oil and Gas Production Forecasts up to 2100,” The Oil Drum, July 16, 2013. Retrieved from www.theoildrum.com/node/10009
Notes on some of Laherrère’s abbreviations:
AEO = Annual Energy Outlook (from EIA) (= US Energy Information Administration)
NOPEC = non-OPEC
Tb = trillion barrels
U = ultimate recoverable
WEO = World Energy Outlook (from IEA) ( = International Energy Agency)
WOO = World Oil Outlook (from OPEC)
The thin blue line at the top right is Laherrère’s prediction of the grand totals, differing considerably from the others.
He explains: “The confidential technical data on [mean values of proven + probable reserves] is only available from expensive and very large scout databases. . . . There is a huge difference between the political/financial proved reserves [so-called], and the confidential technical [proven + probable] reserves. . . . Most economists . . . rely only on the proved reserves coming from [the Oil and Gas Journal, the US Energy Information Administration], BP and OPEC data, which are wrong; they have no access to the confidential technical data.”
The difference between his figures and the various government figures is enormous. It reminds me of the 1950s, when M.K. Hubbert and others were saying one thing, and the government was saying quite the opposite.
A few years ago I met someone who told me that his father had been a geoscientist in the 1950s. Back in those early days, the father had told the son about “peak oil” (in the years to come), but the father also said he would risk being fired if he made any public statement.
It’s considered bad for business to tell your investors that you’re going to be running out of product to sell. To me that sounds in some ways like superstitious nonsense. Surely if a product becomes rarer, each unit of that product gains more financial value for its owner. I suspect the real answer to that question, though, is closer to what Colin Campbell said to Adam Porter in 2004: “If the real figures were to come out there would be panic on the stock markets. . . .”
The general public must be kept happy but ignorant. Well, maybe not too happy, but certainly ignorant, as anyone knows who has had tried to deal with any important global issue, from pollution to population. Newspapers aren’t allowed to print bad news, at least not bad news that would shake anyone up. And the only books one is supposed to read are high-school romances. Orwell had it right, a perfect score (except for the title) when he wrote 1984. Reminds me of a conversation I have at irregular intervals with people I meet. They say, “Everyone knows what Freud/Marx/Darwin said. He was a terrible man.” “Have you ever read any of his books?” Without embarrassment, the answer is an angry “no!” In other words,”Why should I read the books of such a terrible man?”
Oh, well, even Galileo had to deal with disinformation, so who am I to complain?
FURTHER READING
BP. (2013). Global statistical review of world energy. Retrieved fromhttp://www.bp.com/statisticalreview
Heinberg, R. (2013). Snake oil: How fracking’s false promise of plenty imperils our future. Santa Rosa, California: Post Carbon Institute.
Höök, M., Hirsch, R., & Aleklett, K. (2009, June). Giant oil field decline rates and their influence on world oil production. Energy Policy, Volume 37, Issue 6, pp. 2262-72. Retrieved fromhttp://dx.doi.org/10.1016/j.enpol.2009.02.020
Hughes, J. D. (2013, Feb.) Drill, baby, drill; Can unconventional fuels usher in a new era of energy abundance? Executive Summary. Post Carbon Institute. Retrieved fromhttp://www.postcarbon.org/reports/DBD-report-FINAL.pdf
Klare, M.T. (2012).The race for what’s left: The scramble for the world’s last resources. New York: Picador.
Simmons, M. R. (2006). Twilight in the desert: The coming Saudi oil shock and the world economy. Hoboken, New Jersey: John Wiley & Sons.

Could The Markets Crash Again? | Zero Hedge

Could The Markets Crash Again? | Zero Hedge.

This is the trillion-dollar question. From a common sense perspective, the simple answer is “absolutely!”

Since 1998, the markets have been in serial bubbles and busts, each one bigger than the last. A long-term chart of the S&P 500 shows us just how obvious this is (and yet the Fed argues it cannot see bubbles in advance?).

Moreover, we’ve been moving up the food chain in terms of the assets involved in each respective bubble and bust.

The Tech bubble was a stock bubble.

The 2007 bust was a housing bubble.

This next bust will be the sovereign bond bubble.

Why does this matter?

Because of the dreaded “C word” COLLATERAL.

In 2008, the world got a taste of what happens when a major collateral shortage hits the derivatives market. In very simple terms, the mispricing of several trillion (if not more) dollars’ worth of illiquid securities suddenly became obvious to the financial system.

This induced a collateral shortfall in the Credit Default Swap market ($50-$60 trillion) as everyone went scrambling to raise capital or demanded new, higher quality collateral on trillions of trades that turned out to be garbage.

This is why US Treasuries posted such an enormous rally in the 2008 bust (US Treasuries are the highest grade collateral out there).

Please note that Treasuries actually spiked in OCTOBER-NOVEMBER 2008… well before stocks bottomed in March 2009.

The reason?

The scrambling for collateral, NOT the alleged “flight to safety trade” that CNBC proclaims.

WHAT DOES THIS HAVE TO DO WITH TODAY?

The senior most assets backstopping the $600 trillion derivatives market are SOVEREIGN BONDS: US Treasuries, Japanese Government Bonds, German Bunds.

By keeping interest rates near zero, and pumping over $10 trillion into the financial system since 2007, the world’s Central Banks have forced investors to misprice the most prized collateral backstopping the entire derivatives system: SOVEREIGN BONDS.

SO what happens when the current bond bubble bursts and we begin to see bonds falling and yields rising?

Another collateral scramble begins… this time with a significant portion of the interest rate derivative market (over 80% of the $600 TRILLION derivative market) blowing up.

At that point, rising yields is the last thing we need to worry about. The assets backstopping a $600 trillion market themselves will be falling in value… which means that the real crisis… the crisis to which 2008 was the warm up, will be upon us.

This is why Central Banks are so committed to keeping rates low. This is also why all Central Bank policy has largely benefitted the large financial institutions (the Too Big To Fails) at the expense of Main Street…

THE CENTRAL BANKS AREN’T TRYING TO GROW THE ECONOMY, THEY’RE TRYING TO PROP UP THE FINANCIAL INSTITUTIONS’ DERIVATIVE TRADES.

To return to our initial question (is this just a temporary top in stocks or THE top?), THE top is what we truly have to watch out for because it will indicated that:

1)   The Grand Monetary experiment of the last five years is ending.

2)   THE Crisis (the one to which 2008 was just a warm up) is beginning.

 

For a FREE Investment Report outlining how to prepare for another market crash, swing by: www.gainspainscapital.com

 

Best Regards

 

Phoenix Capital Research

Could The Markets Crash Again? | Zero Hedge

Could The Markets Crash Again? | Zero Hedge.

This is the trillion-dollar question. From a common sense perspective, the simple answer is “absolutely!”

Since 1998, the markets have been in serial bubbles and busts, each one bigger than the last. A long-term chart of the S&P 500 shows us just how obvious this is (and yet the Fed argues it cannot see bubbles in advance?).

Moreover, we’ve been moving up the food chain in terms of the assets involved in each respective bubble and bust.

The Tech bubble was a stock bubble.

The 2007 bust was a housing bubble.

This next bust will be the sovereign bond bubble.

Why does this matter?

Because of the dreaded “C word” COLLATERAL.

In 2008, the world got a taste of what happens when a major collateral shortage hits the derivatives market. In very simple terms, the mispricing of several trillion (if not more) dollars’ worth of illiquid securities suddenly became obvious to the financial system.

This induced a collateral shortfall in the Credit Default Swap market ($50-$60 trillion) as everyone went scrambling to raise capital or demanded new, higher quality collateral on trillions of trades that turned out to be garbage.

This is why US Treasuries posted such an enormous rally in the 2008 bust (US Treasuries are the highest grade collateral out there).

Please note that Treasuries actually spiked in OCTOBER-NOVEMBER 2008… well before stocks bottomed in March 2009.

The reason?

The scrambling for collateral, NOT the alleged “flight to safety trade” that CNBC proclaims.

WHAT DOES THIS HAVE TO DO WITH TODAY?

The senior most assets backstopping the $600 trillion derivatives market are SOVEREIGN BONDS: US Treasuries, Japanese Government Bonds, German Bunds.

By keeping interest rates near zero, and pumping over $10 trillion into the financial system since 2007, the world’s Central Banks have forced investors to misprice the most prized collateral backstopping the entire derivatives system: SOVEREIGN BONDS.

SO what happens when the current bond bubble bursts and we begin to see bonds falling and yields rising?

Another collateral scramble begins… this time with a significant portion of the interest rate derivative market (over 80% of the $600 TRILLION derivative market) blowing up.

At that point, rising yields is the last thing we need to worry about. The assets backstopping a $600 trillion market themselves will be falling in value… which means that the real crisis… the crisis to which 2008 was the warm up, will be upon us.

This is why Central Banks are so committed to keeping rates low. This is also why all Central Bank policy has largely benefitted the large financial institutions (the Too Big To Fails) at the expense of Main Street…

THE CENTRAL BANKS AREN’T TRYING TO GROW THE ECONOMY, THEY’RE TRYING TO PROP UP THE FINANCIAL INSTITUTIONS’ DERIVATIVE TRADES.

To return to our initial question (is this just a temporary top in stocks or THE top?), THE top is what we truly have to watch out for because it will indicated that:

1)   The Grand Monetary experiment of the last five years is ending.

2)   THE Crisis (the one to which 2008 was just a warm up) is beginning.

 

For a FREE Investment Report outlining how to prepare for another market crash, swing by: www.gainspainscapital.com

 

Best Regards

 

Phoenix Capital Research

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