EU plans to place sanctions on
oil; a reflection of state of global economy? Iran
When I first heard of EU plans to stop buying crude oil from
, I was baffled. The IEA was projecting oil demand growth of 1.3 mb/d for 2012, and even with the expected Libyan oil coming back on line, it was difficult to see where this extra oil would come from. EU sanctions, coupled with Japanese and South Korean initiatives could potentially remove another .7 million mb/d from the market, leaving us with a gap of up to 2 mb/d, that will have to be made up. A weak EU economy, shaken by the current sovereign debt crisis, cannot afford more pressures on its economy, such as a price spike in oil prices would deliver, so I could not understand their reasoning behind their decision. Iran
In comes the IEA & the World Bank to clarify things
Now the picture is becoming clearer, given recent forecasts coming from the IEA, and the World Bank. The IEA slashed its demand forecast by 200,000 b/d for 2012; furthermore they now believe that we could see a slump in demand, which might leave demand growth flat for 2012 from the previous year, in other words, they expect further downward revisions. The World Bank also slashed its global economic growth outlook to 2.5% for 2012, and 3.1% for 2013. That might not sound bad for those who do not follow economic issues, but it is. A relatively healthy global economy is usually growing at 4% or more. We have to remember that we are living in a converging world, and, while the developed world would be jumping with joy at the prospects of 2.5% growth, in
5% growth will feel like a recession. The World Bank also stated that the picture can worsen considerably if the situation in China Europe will deteriorate. When I first heard of the EU plans for sanctions on , it left me confused, but now I understand that it is only a confirmation of the fear on the part of the World Bank and the IEA, that we likely won’t have to worry about meeting a growing demand for crude, because it is not likely to materialize. Iran
Understanding the impact of
’s crude on the market. Iran
We now know the World Bank estimates global GDP growth to be 2.5% in 2012, and 3.1% in 2013. In the past decade, there was an increase in petroleum demand of 1%, for every 2.5% global GDP growth. That simple analysis would lead us to believe that we would need a net gain of about 900,000 mb/d to come online each year for the next two years. This picture is not entirely accurate however. I believe that at a price of $80-100, per barrel, which is where we are right now, we can achieve 2% global GDP growth, without the need of an increase in petroleum supply, because the higher price will be a dampener on demand. Only once we breach the threshold of 2% growth, does the market demand an increase in supply, through a rise in prices. Unconventional sources of petroleum can supply the world with an annual increase of a few hundred thousand barrels per day, so as long as conventional supplies remain flat, we might be able to support global economic growth of 3%. So the fact that Europeans believe they can feel comfortable risking the loss of about a quarter of Iran’s exports on the world market might signal that 3% global growth might actually be the best we can hope for in the next three to four years. In other words, the developed world will grow at about 1-2%, while the developing world will grow at 4-5%.
One might be tempted to assume that the EU is making a mistake, because in current conditions, more Iranian crude would help lower the price, which will increase demand, but it will also boost the economy. Reality is that prices can no longer go bellow $80 a barrel for a prolonged period, without causing supply to drop sharply as well. The volume we would loose if we were to have crude oil prices bellow $80 a barrel for a prolonged period would exceed greatly the amount of oil we can potentially loose if
chooses not to sell its oil at a discount in response to the sanctions. We have more and more expensive oil coming online, as the conventional fields are no longer keeping up with demand, and as they age, they also in effect become unconventional fields. In effect, we are stuck in a situation where petroleum prices cannot drop bellow $80, and that is a dampener on global GDP growth. Slightly more Iranian crude hitting the market cannot change that. Only massive volumes of new cheap liquid fuels production, which would make our growing dependence on expensive petroleum liquids unnecessary would change this fact. Iran
Effects of this reality:
At average global growth rates of 3% or less, the ranks of the global poor will increase, not decrease, because that growth will not be shared equally by the citizens of the ‘global village”. As a result, we can expect that 2011 will not be the only year of the protester, as Time Magazine decided to name it.
In the developed world, this level of economic expansion will not suffice to allow us to keep up with growing debt, especially at government level. More cuts in the basic social safety net, in education, R & D, and in infrastructure will be forthcoming. The ranks of the middle class will continue to be eroded slowly.
At 4-5% yearly growth in the developing world, some will benefit, but the vast majority, will se no hope of exiting their state of brutal poverty. A society without hope cannot expect long term social cohesion and stability.
In the absence of robust growth, the supporters of the peak oil theory will have to continue yielding the podium to the deniers, because our ability to provide continued growth in supplies will never be tested. The deniers will continue to point to continued growth in the total liquid fuels supply as proof that we are not facing supply constraints. People like Daniel Yergin will be able to convince us that our path is sustainable, and there is no need to change. With 3% global GDP growth rates, it will continue to be a winning argument for a decade or so. After that, conventional crude supplies will probably start declining, after spending about 15 years on a plateau, which is mainly maintained due to the current environment of much higher prices than we experienced before 2005, when this plateau was reached. Once conventional crude starts declining, unconventional supplies, which is where we have been getting our comparatively meager increase from for the past five years now, will not be able to give us continued supply growth, because most of it will go to making up for lost production in conventional supplies, which currently make up 80% of total liquid fuel supply.
The sluggish economy will never ever be blamed on the higher fuel costs, and price shocks, but it is in my view no coincidence that about two years after conventional crude production peaked, the global economy never regained its momentum we experienced before. We seem to be settling into a pattern of average growth rate that is lower by about 1% per year, and there is no reason thus far to assume that this pattern will change anytime soon to the upside. If anything, we can expect a further readjustment of our trajectory to the downside, mainly as a result of systemic risks, stemming from sovereign government debt growth, outpacing nominal GDP growth (nominal GDP = Real GDP + rate of inflation). When we will reach the point where the current higher price of petroleum will no longer suffice to keep conventional petroleum supply on its current plateau, which will likely happen around 2020, the event will lead to a further downward adjustment of the economy’s trajectory as well.
Note: As average growth of liquid fuels supply slowed starting from 2006, after the peak in conventional petroleum supply, from a rate of 1.7% yearly growth to just .4%, GDP growth rate also slowed from an average yearly growth rate of 4.2%, between 2001-2007, to a rate of 2.8% from 2008-2013, if World Bank projections are correct for the 2012-13 period. Some may argue that it is the other way around, and liquid fuel supply is reacting to the slowing economy. That is a false claim however, because in 2011, liquid fuel production was outpaced by consumption by a narrow margin, which negates the possibility that supply is simply lower due to demand being lower.
Throughout all this, the peak oil deniers will continue to argue that we are not experiencing a supply problem, but a demand problem instead, due to the weak economy. The weak economy will not be linked to the event when conventional crude peaked, which happened around 2005, at least until about 2025, or a few years after total liquid fuel supplies will follow the fate of conventional petroleum and peak as well. In the meantime, the plan that is in place to deal with this is to do nothing. We continue to hear claims that wonder technologies, made available to consumers courtesy of market forces will save the day. In last week’s article, I pointed out that in the previous two decades, we also had technological evolution, as well as economic events that acted as dampeners on energy demand, yet we still increased global consumption by about 40% during that period. In the absence of a global mechanism to encourage efficiency, I doubt the current path will lead to a betterment of our lives, and a sustainable path that will allow for basic geopolitical stability for our planet.
As long as the peak oil and environmental degradation deniers continue to own the podium, there is little chance that support for a new way of doing things will ever materialize to cause change to happen. Politicians of all political backgrounds will promise us change.
US president Barack Obama promised to pursue policies that will commit the US to reducing greenhouse gas emissions from the economy by 80%, by 2050. Committing to reduce greenhouse gas emissions by 5% during his presidency would have never been a promise he would have committed to, because that is a promise for the present, so he would actually have to do something to make it reality. Such a promise he knows very well why he would never make. So far, the only force that has proven effective in reversing the current trend of increased greenhouse gas emissions has been recession. In the current global economic environment, doing something about environmental degradation on a local level, only leads to economic hardship, because it is clear now that other players who refuse to do the same, automatically gain an economic advantage. That is why I proposed the sustainability trade tariff in my book ‘Sustainable Trade”, as a means to encourage sustainable economic growth. Perhaps if we had a means in place to be able to adapt to the challenges we face, we would be less inclined as a society to yield the podium to the deniers. US