Life Is Like A Cup of Coffee

Projection of world energy supplies

Oil supplies may not last forever, but oil will be available long after our children's lifetimes. While no one can accurately predict oil's relative supply and demand, even in the near future, several theorists have attempted to predict when the world will deplete its oil supply. The most notable theorist on this subject is M. King Hubbert.

Chart courtesy of Earth Science World and Exxon-Mobil

Hubbert's Peak

In the 1950's, Hubbert claimed that oil was a resource which would not last forever and that production will rise to a point which cannot be sustained and then die down to a point of total depletion. Understanding his model, one can conclude that once Hubbert's Peak has been reached, half of the world's oil reserves will have been depleted. This can also be used for an oil and gas field with many wells. When one takes what has already been produced from the field and what can potentially be produced for the field and combine these two numbers, they get the ultimate potential of the field. Its peak in production would be placed at the ultimate divided by two.
The problem with determining the peak in world production is one must use estimates to determine ultimate world production. There are three main numbers or concepts used to do this: 1) cumulative production or what is known as reserved production; 2) knowable, undiscovered production; or 3) what is predictable from past trends. From these numbers, we can estimate that ultimate equals cumulative production plus reserved production plus undiscovered production.


However, due to each country's different analysis for total production of oil and gas, determining the ultimate world oil production is very difficult and highly debatable.

Chart courtesy of Earth Science World and Exxon-Mobil 

Each country will have its peak. Hubbert predicted that the United States would reach its peak in the 1970's and it appeared to do so. The country was depending on Texas for the bulk of its oil, and when the Texas Railroad Commission announced in 1971 that Texas was at 100 percent capacity, the Organization of Petroleum Exporting Countries (OPEC) was created to control the supply of oil and gas for the world market.

Hubbert suggested that it will take many years to completely deplete the world's oil supply. However, he also suggested that each country will have its peak and then experience decreasing production from there. We are already seeing that some Middle Eastern countries may have peaked due to a decline in production. So, what does this mean for the oil industry? Cheap oil will likely be a thing of the past in the next 10-20 years.

While there is no denying that there is a finite amount of oil and gas on this planet, new technologies and recovery methods continue to increase the percentage of an existing field's recoverable oil and gas. At the same time, while the rate of discovery of new fields declines, we are getting better at finding them by digging deeper and in more isolated areas. Who's to say there will not be advances that once again tip the scales in favor of more supply than demand?

The global crash:Japanese lessons

After five years of crisis, the euro area risks Japanese-style economic stagnation

FIVE years ago, things looked rosy. In the first week of August 2007 forecasts by investors and major central banks predicted growth rates of 2-3% in America and Europe. But on August 9th 2007 everything changed. A French bank, BNP Paribas, announced big losses on subprime-mortgage investments. The same day, the European Central Bank (ECB) was forced to inject €95 billion ($130 billion at the time) of emergency liquidity. The crisis had begun.

During the first year, policymakers looked to Japan as a guide, or rather a warning. Japan’s debt bubble had caused a “lost decade”, from 1991 to 2001. Analysts commonly drew three lessons. To avoid Japanese-style stagnation it was vital, first, to act fast; second, to clean up battered balance-sheets; and, third, to provide a bold economic stimulus. If Japan is taken as the yardstick, America and Britain have a mixed record. The euro area looks as if it might be turning Japanese.

Debts took years to build up. Take the American consumer. Debt was around 70% of GDP in 2000, and grew at around 4 percentage points a year to reach close to 100% of GDP by 2007. The same was true of European banks and governments: debts rose hugely but steadily. It was not hard to spot debt mountains forming.

The crisis erupted with the realisation that subprime exposures were widespread. Many assets were worth less in the market than they had been bought for. Debts started to look unsustainable and interest rates jumped. This meant governments, consumers and banks, after building up debt slowly, suddenly faced much higher costs, as debts matured and they were forced to refinance at higher rates.

The reaction was quick. By the end of 2008 the Federal Reserve, the ECB and the Bank of England had slashed official interest rates. Their aim was to offset the spike in debt costs that companies and consumers were facing. The cuts were fast by Japanese standards (see top right-hand chart). It seemed the first lesson had been learnt.

Falling asset prices meant that many banks and firms had debts that outweighed their assets. The Japanese experience showed that the next job was to deal with these broken balance-sheets. There are three main options: renegotiate debt, raise equity or go bankrupt.

In the efforts to reinvigorate balance-sheets, debt investors have reigned supreme. Debts have been honoured. Indeed, a recent report from Deutsche Bank shows that even investors in risky high-yield debt have had five great years. Bank bonds in America have returned 31%; in Europe, 25%.

As asset values fell, debt maintained its fixed value. This meant that equity, the balance-sheet shock-absorber, had to fall in value. So although debt caused the problem, equity took the pain. A Dow Jones index of bank equity is down by more than 60% since 2007, according to Deutsche Bank. Some banks’ share prices are down by more than 95%.

In many cases, the equity buffers were too small, so governments stepped in, taking equity stakes in banks. In both America and Europe governments stood behind their financial sectors. Balance-sheets were repaired. It seemed the second lesson from Japan had been learnt too.

But the clean-up just moved the problem on. Governments borrowed to fund the bail-outs. So banks’ balance-sheets were strengthened at the expense of public ones. America’s support for the banks cost 5% of GDP; Britain’s cash injection into its ailing banks was 9% of GDP. And household debt was still high.

A third lesson from Japan was to seek a strong stimulus: in a growing economy, high debt need not be a problem. Take a household’s finances. A large mortgage is fine as long as breadwinners’ incomes are sufficient to pay the interest and leave some to spare. Inflation helps too, as debts are fixed at their historical values but wages should rise with inflation.

Following Japan’s example, central banks engaged in “quantitative easing” (QE), buying bonds for newly created cash (see bottom left-hand chart). This aims to drive up bond prices, lowering yields and making debt manageable. The QE programmes have been bolder than Japan’s and corporate-bond yields have indeed fallen (see Buttonwood).

But although policymakers learnt some lessons from Japan, there are reasons to worry about the next five years. In Britain and America there are two main concerns. First, the fiscal stimulus may not be bold enough and in Britain is being withdrawn before the economy is back on its feet. Having supported banks, governments are trying to cut deficits and have little to spend. Richard Koo of Nomura, a bank, reckons Japan’s experience shows that governments should increase borrowing to mop up private-sector savings.

Second, government bail-outs can have long-term costs. In some cases, broken balance-sheets are a sign of a broken business model; bankruptcy is then a better option, cleansing the economy of unproductive firms. Japan kept too many bad firms going. There are signs of that in America and Britain too. The American government’s bail-outs ran to over $601 billion, with 928 recipients across banking, insurance and car industries. Britain has large stakes in two of its four big banks and has no clear plans to sell them.

The euro area is in a more dangerous position. Its recovery has been painfully slow (see bottom right-hand chart). Its prospects look grim: data released on August 1st showed German, French and Italian manufacturing contracting at an increasing rate (dragging Britain down with them). And to the meagre stimulus and zombification of industry can be added a third Japanese trait—policy indecision. On August 2nd Mario Draghi, the ECB's head, indicated the bank's readiness to buy bonds again as part of a co-ordinated rescue plan. Stockmarkets initially fell, suggesting the investors are unconvinced that it will save the euro area from aping Japan.

The Economist

The Greek economy,Promises, promises

The reform programme is badly behind schedule

 

This way to the reforms

BY LATE July Greece had completed only about 100 out of more than 300 reform benchmarks set by international lenders after their last visit to Athens in February. Two elections this year have not helped to speed things up. And despite two bail-outs since May 2010, left-of-centre politicians are still trying to dilute or delay a raft of fiscal and structural measures needed for Greece to stay in the euro zone and pull the economy out of a five-year slump.

Take, for example, Evangelos Venizelos, leader of the PanHellenic Socialist Movement (Pasok), a junior partner in the six-week-old coalition government led by Antonis Samaras, the conservative prime minister (pictured left, with José Manuel Barroso, president of the European Commission). When he was finance minister, Mr Venizelos pushed through parliament a €11.5 billion ($14.1 billion) package of spending cuts agreed upon in March as part of the second bail-out. They are to be implemented in 2013 and 2014 and the details are being worked out. Yet on July 29th Mr Venizelos, trying to rebuild Pasok’s popularity with Greek voters, defiantly suggested the reforms be spread out over four years, not two (he later backtracked).

Greece has legislated plenty of reforms but failed to implement many of them, say frustrated officials from the “troika” (the European Commission, the International Monetary Fund and the European Central Bank) responsible for overseeing the process. A former government adviser says: “A huge amount of work has been done, yet almost nothing has actually been completed to the satisfaction of our partners.”

The stakes are higher than ever. Greece will not receive any more rescue funding until the medium-term package is in place. Without that money, the government will run out of cash to pay pensions and public-sector salaries in September, if not sooner. A disorderly exit from the euro could follow within a few weeks, warned Yannis Stournaras, the finance minister.

Greece has performed badly on many measures. On privatisation, the troika has set an ambitious goal of €50 billion in revenues. But this year’s target of €3 billion has been slashed to €300m. Only two disposals are likely to be completed by December: the state lottery and the former international broadcasting centre for the 2004 Athens Olympics, now a shopping mall. Almost 80 legislative and administrative measures will be needed before the next six deals can go ahead.

Greece is supposed to raise €19 billion in privatisation income by 2015, and the remaining €31 billion over the following decade. Yet even if the deal pipeline is accelerated by the new chairman and chief executive of the Hellenic Asset Development Fund (TAIPED), the privatisation agency, appointed last month by the coalition government, few investors are likely to appear until it becomes clear whether Greece will stay in the euro zone.

An overhaul of the tax administration, including closures and mergers of 200 regional tax offices, was due to be completed in June. Little progress has been made, and no new deadline has been set. Corruption among tax inspectors is rife, according to the state auditor. Only €10 billion of some €40 billion of outstanding taxes can be collected, a government adviser says. Officials are likely to keep reforms on a back burner, fearing that revenues would plunge if they attempt to transfer or sack taxmen. Several hundred big tax evaders have been identified, yet so far none has been convicted or imprisoned.

Piecemeal adoption of measures and failure to crack down on corruption have left the health system in disarray. Spending on prescription drugs has been reduced, but another €1 billion (0.5% of GDP) of annual cuts have still to be made, as doctors and hospital procurement departments are reluctant to switch from expensive branded drugs to cheaper generic versions. Plans to reduce costs by merging or closing about one-third of state hospitals are running well behind schedule.

Ready, aim, don’t fire

Last year’s target of cutting 30,000 public-sector jobs and transferring workers to a strategic reserve on lower pay was missed by a wide margin. Following pressure from trade unions, fewer than 10,000 workers were sent to the reserve. The medium-term programme calls for shedding 150,000 public-sector jobs by 2015, but with unemployment already at 22.5% the government is trying to find other ways of reducing the payroll—for example, hiring one worker for every ten who retire or leave. This year’s goal of 15,000 job reductions is unlikely to be achieved.

Moves to give teeth to Greece’s feeble competition agency have been delayed. As a result cartels still control prices of many consumer products, and prices are still rising slowly, even though the economy has shrunk by more than 13% in three years. Annual inflation was almost 3% last November, but had dropped to 1% in June.

Corruption is one reason why Greece struggles to attract investors. (One local whistle-blower found an unexploded grenade on his car windscreen last month.) Another is poor legislation. Red tape is still a problem despite two new laws aimed at removing obstacles to investment. Yet more legislation to speed up “fast-track” investment is awaited. Greece, home of the marathon, badly needs to start sprinting.

The Economist

Spain and the markets

The Spanish patient:A full bail-out of the euro area’s fourth-largest economy is looming

IF SPAIN were a patient, the mood in the hospital ward would be tense. Every attempt by local specialists advised by renowned European consultants to treat the sickness brings no more than temporary relief. Even more worrying, the relapses after each dose are happening sooner and sooner. Spain’s chances of avoiding intensive care—a full bail-out—are receding to near vanishing-point.

The symptoms of Spanish sickness are manifest in ten-year government bond yields touching 7.75% on July 25th; previous bail-outs of Greece, Ireland and Portugal occurred not long after rates had surpassed 7%. Even more perturbing, two-year yields also briefly went above 7%, in effect foreclosing the government’s ability to borrow at anything but short maturities.

No isolation ward is possible in the financially integrated euro area and Spain’s sickness quickly infected other countries. The Italian ten-year bond yield went above 6.5%, its highest since January. European stockmarkets retreated and Italy’s fell to a euro-era low. Sentiment was further soured by a report from Moody’s, a ratings agency, saying that Germany, Luxembourg and the Netherlands might lose their cherished triple-A status. The prognosis was based in part on fears about the public-debt burden that northern countries might have to assume if bail-outs spread.

The market funk was the more troubling since a Spanish government with a lot going for it had appeared to be getting a grip. Public debt is rising fast, but at 69% of GDP last year was far lower than Italy’s 120%—and less even than Germany’s 81%. The budget deficit is high (8.9% of GDP in 2011), but only a week before the market panic Mariano Rajoy, the prime minister, announced more tough austerity measures. And on July 20th European finance ministers sanctioned the first tranche of a partial bail-out worth up to €100 billion ($121 billion) for Spanish banks.

So why are investors in such a cold sweat about Spain? One reason is that Mr Rajoy flunked hard choices at the outset, notably the cleansing of the banks. Despite a low starting-point for public debt, deficit overshoots have revealed insufficient central control over the 17 regions that are responsible for a big chunk of spending. Investors fret that more regions may follow Valencia, which applied for aid on July 20th. They are in any case sceptical that Spain can meet its targets for cutting the deficit in the teeth of a recession that is harsher than expected.

The biggest worry is Spain’s external debt. Spain ran hefty current-account deficits in the first decade of the euro. As a result, its liabilities to foreign investors exceeded the assets that its residents own abroad by 92% of GDP last year, among the highest in the euro area. The problem for Spain is that foreign capital has been fleeing over the past year. That has weakened the banks and the economy and left the Spanish government shunned by foreign investors for its own financing needs.

The European summit in late June offered a flicker of hope but it is guttering. Euro-area leaders agreed that the European Stability Mechanism (ESM), their new permanent rescue fund, would be able to inject funds directly into banks rather than via loans to the government. That perked markets up since it promised to sever the link between weak banks and weak sovereigns. But before long the deal looked less solid: the ESM cannot come into force until September, when Germany’s constitutional court will rule on its legality. Assuming it passes that test, the ESM cannot be used for direct bank recapitalisation until a European supervisor is put in charge.

Spain may yet be able to fend off a bail-out for some time. It has some cash reserves and can still borrow at short maturities. The euro area also has its temporary rescue fund, which will lend the Spanish government the initial sum of money for the banks. But even if Spain survives a hot summer, the markets are signalling that it will need a full bail-out later this year.

That would be a nightmare, and not just for Spain. The Spanish government must borrow €385 billion until the end of 2014 to cover its budget deficit and other needs such as bond redemptions, according to economists at Credit Suisse. Even if the IMF chips in a third as in previous bail-outs, European lenders would have to find €250 billion or so. They have already committed €100 billion to rescuing Spanish banks, so for other emergencies they would have only €150 billion of the €500 billion now in their rescue kitties.

The course of events is eerily similar to what happened a year ago. Then European leaders appeared to have secured their summer holidays with a “breakthrough” summit. But things soon fell apart. Nerves about Italy and Spain were calmed only when the European Central Bank (ECB) started buying their bonds. The central bank was never keen on this and it has not been buying bonds for several months. Even if the ECB were to resume purchases they might be less effective than before, because its refusal to share in the pain of the Greek debt restructuring in March frightened bondholders elsewhere.

The awkward truth is that the Spanish government is not alone in flunking hard choices. The plight of Spain and the danger of its sickness spreading to Italy call for a decisive countermove by Germany and the ECB. One being discussed would be to give the ESM a banking licence, which would magnify its resources by allowing it to borrow from the central bank. The graver the euro crisis gets, the bigger the response has to be—and the harder it is to sell to sceptical northern electorates.

The Economist

Who's scared of China?

Sep 20th 2012, 15:35 by The Economist online

Some countries see an opportunity rather than a threat in China's economic rise

AS THE American presidential election looms, so the electioneering moves up a gear. This week on the campaign stump in carmaking, swing-state Ohio, President Obama announced that the government had filed a complaint against China at the World Trade Organisation for subsidising car-part exports. Mitt Romney accused the president of not going far enough. China, meanwhile, lodged a trade dispute of its own on the same day, alleging duties levied by America on Chinese steel, paper and other products are unfairly high. A Chinese spokesman later stated that China's complaint was lodged first, and that America's filing had a "political goal". Nonetheless, a tough China stance is likely to play well in the campaign. Most Americans see China as an economic threat, according to the recent Transatlantic Trends survey by the German Marshall Fund of the United States. Indeed, of the 14 countries polled, only in France did a higher proportion view China as a threat. In contrast, despite being overtaken by China as the world's biggest exporter in recent years, more people in neighbouring Germany see China as an economic opportunity.

Correction: We mistakenly showed the results of an old (2011) survey in the original chart. This was corrected on September 21st. Sorry about that.

World debt comparison

Our interactive overview of government debt across the planet

The clock is ticking. Every second, it seems, someone in the world takes on more debt. The idea of a debt clock for an individual nation is familiar to anyone who has been to Times Square in New York, where the American public shortfall is revealed. Our clock (updated September 2012) shows the global figure for almost all government debts in dollar terms.
Does it matter? After all, world governments owe the money to their own citizens, not to the Martians. But the rising total is important for two reasons. First, when debt rises faster than economic output (as it has been doing in recent years), higher government debt implies more state interference in the economy and higher taxes in the future. Second, debt must be rolled over at regular intervals. This creates a recurring popularity test for individual governments, rather as reality TV show contestants face a public phone vote every week. Fail that vote, as various euro-zone governments have done, and the country (and its neighbours) can be plunged into crisis.