Monday, March 5, 2012

Maximum potential global GDP growth to 2030: An assessment, based on resource availability.


            There are many long-term global growth models out there, which intend to give us a guide to our economic future, including assessments made by prestigious organizations such as Goldman Sachs, the OECD, IMF and the World Bank.  Most current projections give us a picture of a global economy that has cooled somewhat from the pace we saw in the decade before 2008, but the mainstream consensus outlook is that the developing world will continue to converge with a growth rate averaging about 5%, while the developed world will expand at about 2.5% per year.  The global average is over 3% according to most mainstream institutions. 

            I want to add my own view to the conversation about this future of ours.  It is a view based on a slightly different calculation, and as such it provides for slightly different results.  The results unfortunately cannot be presented with the same comforting precision that the above mentioned mainstream institutions provide us with, partly because I believe it to be false manufactured comfort.  I decided to present my projections in terms of different trajectories, and the likelihood of occurrence for each scenario.  These scenarios I calculated based on resource scarcity probability and potential intensity of scarcity, as the main determining factors for the maximum potential growth that the world can achieve.

The commodities I think are crucial and in danger of not meeting demand, I grouped in three categories.  The first is oil and liquid fuels.  The second is food, and the third is comprised of a group of potentially scarce resources, which might let us down to some degree.

Oil & Liquid Fuels:

            Based on past economic data, it seems that global economic growth rates of 1.5% can be achieved without the need to expand liquid fuel supply.  I decided to increase this to 2% in my calculations, in order to deflect criticism on behalf of the worshipers of human ingenuity and the market.  In addition, a 1% increase in supply allows for an additional 2% Global GDP expansion, based on past history.

            There are about 6 trillion barrels of conventional oil in place, of which 1.1 trillion have been consumed.  Current field recovery rates are about 40% of the total oil in place.  Conventional petroleum production peaked in 2005.   According to the EIA, we should expect unconventional liquids to grow at an average rate of .5 mb/d.  I prepared three different scenarios for global liquid fuels supply, based on the assumption of a constant, which is the growth in unconventional, and the second variable on conventional supplies affected by field recovery rates, where I included the three different scenarios.  Current supply of all liquid fuels is at 87 mb/d, as measured by the EIA. 
One final note I want to make, is that I did not include an adjustment downwards, which is warranted due to a continuing trend of the decrease in energy return on energy invested, as well as a decline in average energy content per barrel unit of liquid fuels produced.  So in many ways, my projections might actually be somewhat optimistic.

Three scenarios for liquid fuels:

- 50% ultimate recovery from conventional fields, means that current peak and plateau is not permanent:

87 mb/d + 15 mb/d (10 mb/d unconventional & 5 mb/d conventional by 2030) = 2% + 1.5% = 3.5% annual average GDP growth.

- 45% ultimate recovery rate from conventional fields means that conventional crude will remain on the current supply plateau.

87 mb/d + 10 mbd (10 mb/d unconventional & 0 mbd conventional by 2030) = 2% + 1% = 3% annual average GDP growth.

- 40% ultimate recovery rate from conventional fields means that conventional crude supplies will decline from current plateau.

87 mb/d + 0 mb/d (10 mb/d unconventional & -10 mb/d conventional by 2030) = 2% + 0% = 2% annual average GDP growth.

Adding food to the equation:

For food price inflation, I assume current recent trends to continue, due to a continued increase in the world’s population, as a well as a growing appetite per capita.  The key is for productivity per unit of land to continue to increase to match these demands, as well as the continuing demand for liquid fuels derived from food if we are to prevent significant food price inflation.  It is somewhat harder to measure the effect on global GDP growth, but it is sensible to assume that a doubling in prices in real terms, means a decline in maximum global GDP growth rates of about 1%.

Nine scenarios for food and liquid fuels together:

No food inflation means, there is no effect on GDP growth, therefore 3.5%, 3%, and 2% will remain the most likely outcomes as indicated by the above seen petroleum availability scenarios.

50% increase in the real price of food:

3.5% - .5% = 3% maximum potential GDP growth
3% - .5% = 2.5% maximum potential GDP growth
2% - .5% = 1.5% maximum potential GDP growth

100% increase in the real price of food:

3.5% - 1% = 2.5% maximum potential GDP growth
3% - 1% = 2% maximum potential GDP growth
2% - 1% = 1% maximum potential GDP growth

Other Potential Shortages: (Coal, Water, Phosphate Rock, Copper, Silver, Rare Earths, just to name a few)

            At this point, it is hard to quantify precisely what effect; shortages of these above mentioned resources can have on GDP growth.  As is the case with oil and food, which we already looked at, some economists, will actually argue that none of these potential shortages can have a long term effect on GDP trajectory.  They tend to argue that the market is always able to substitute away from a commodity that might be in short supply, to more abundant commodities.  My own view is that there is a limit to how many opportunities there are to substitute from less abundant to more abundant commodities.  We have to keep in mind that we live on a finite planet.  I do believe that many potential commodity shortages can have a negative effect on long term economic growth.  Unlike with petroleum however, it is harder to comprehend the proportionality and the magnitude of it, because we cannot easily correlate potential GDP growth to supply growth, simply because few commodities are on their own as crucial as petroleum to the economy.  In the absence of a way to quantify the magnitude of the effect on global growth caused by potential shortages of many commodities, I decided to assign a 1% drop in maximum potential GDP growth to a scenario of a high degree of shortages, and a .5% drop in the case of some moderate shortages.

The 27 final scenarios when all three categories of shortages are added together

In the event of no shortages of key commodities at least until 2030, there would obviously be no effect on top of what we saw with the liquid fuels and food.  In this scenario, economic growth would be as indicated by the nine scenarios examined when food and liquid fuel probabilities were combined.
In the event of a .5% drag on global GDP yearly growth, caused by some moderate shortages added to previous scenarios of liquid fuels and food shortages:

                                                             

Liquids
Food
Other Shortages
Max Potential GDP Growth
3.5%
0%
.5%
3.0%
3%
0%
.5%
2.5%
2%
0%
.5%
1.5%
3.5%
.5%
.5%
2.5%
3%
.5%
.5%
2%
2%
.5%
.5%
1%
3.5%
1%
.5%
2%
3%
1%
.5%
1.5%
2%
1%
.5%
.5%

In the event of severe shortages causing a 1% drag on yearly global GDP growth rate, in addition to liquid fuels and food:


Liquid Fuels
Food
Other Shortages
Max Potential GDP Growth
3.5%
0%
2.5%
3%
0%
1%
2%
2%
0%
1%
1%
3.5%
.5%
1%
2%
3%
.5%
1%
1.5%
2%
.5%
1%
.5%
3.5%
1%
1%
1.5%
3%
1%
1%
1%
2%
1%
1%
0%


The result of the compilation of these glimpses within a range when adding together all scenarios after all three categories of potential shortages are put together, which actually contains countless possibilities, we get 27 possible scenarios, which can help us understand the likelihood of various potential economic futures, based on commodity availability.

Conclusions:

The following graph gives us the percentage probability of growth in the eight different ranges we got from the above calculations.




Remember that most mainstream institutions projected an average rate of global GDP expansion of over 3% for this same period as the most likely scenario, which runs counter to my own projections, which show that the likelihood of achieving growth of over 3% on average is less than 15%.  My projections also give us the maximum we can achieve given resource constraints, which means that other factors can only move the actual rate of growth down.

            It is by no means a coincidence that mainstream institutions all predict a rate of growth of over 3%.  It just so happens that this is the threshold that we need to pass if we are to ensure long term global financial stability.  If long term growth will trend under this threshold, the risk of systemic problems increases.  If the rate of maximum growth potential will average somewhere between 1% & 3%, we are looking at severe risk of financial implosion.  Having said that, there is nevertheless, a good chance to keep the system going, as long as cool heads will prevail among the global elites.  Keeping it together will still mean severe global misery, and the severity of it will be increasing, if we will find ourselves on the lower end of the above mentioned range of maximum potential growth.  I should also note here that the symptoms will not feel like commodity shortages.  Price spikes will be brief, and quickly forgotten.  The financial side-effects will be what everyone will be talking about and fixating on as the main problem.  Most of the two decade period will feel similar to what we experienced so far from 2007 to the present or perhaps even worse.  The graph I constructed shows that the bulk of the possible scenarios point to this being the most likely future we face for the next two decades

            As the graph shows, there is also a 10% possibility of us not even having the comfort of maximum potential global growth of 1% or higher.  If this will turn out to be the case, we will no longer be arguing about the cause of our economic hardships.  Most of us will be too busy trying to figure out a way to survive from day to day.  Complete financial collapse will occur sometime before 2030 in this scenario of resource scarcity, because the systemic risks will become uncontainable. 

Many might be tempted to point out that even if I happen to be right (which I cannot even be 100% certain of myself), the risk I presented here of a total collapse is only 10%, which means that we have a 90% chance of avoiding disaster by doing nothing.  I have to disagree with that view.  We are currently in the middle of deciding whether we should do something very drastic, in order to prevent Iran from acquiring a nuclear weapon.  Some are contemplating starting a war, which itself caries many risks to our economic wellbeing.  There is in my view far less than a 10% chance of Iran using the bomb, if they in fact end up getting it, because they know exactly what the retaliatory measures will be if they do.  So if we are so eager to contemplate starting a potentially disastrous war, in order to prevent a much smaller than a 10% probability of disaster, should we not also contemplate ways to prevent a 10% chance of a potentially much greater global disaster?  After all, what if I am right? 

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