FRACTIONAL FLOW

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Archive for the ‘BP Statistical Review’ Category

Developments in Energy Consumption and Private and Public Debt per 2016

For some time I have explored the relations in developments for total debt [private and public], interest rates, Gross Domestic Product (GDP) energy consumption and thus also the oil price.

My theory has been that there are relations between changes to total debt and energy consumption and thus energy prices. Changes to total credit/debt should thus be reflected in energy consumption. Price formation is also influenced by several other factors and most prominently supply and demand balances.

To me, demand appears to be the one that is poorly understood and demand has been, is and will continue to be what one can pay for.

All transactions involving products and services require some amount of energy thus currency/money becomes a claim on energy.

During the last decades the world was in a gigantic experiment with debt expansion, most recently fueled by low interest policies which allowed to pull demand forward and for some time negate higher prices when demand ran ahead of supplies.

Debt expansions can go on until they cannot, as some economies already have experienced. In the recent decades, growth in total debt was higher than the growth in GDP (ref figure 1) and there is a strong relation between changes to total debt and GDP.

Figure 1: The chart above shows [stacked areas] developments in total private and public debt in Japan (black/grey), Euro area (yellow), US (blue) and China (red).
In the chart is also shown [stacked lines] developments on the Gross Domestic Product (GDP) for the same 4 economies.
NOTE: All data are market value, US$.
The GDP (lines) have been stacked. The bottom line shows Japan, next is (Euro area + Japan) and the top line [China] also shows the total for the 4 presented economies.
Data on private and public debt from Bank for International Settlements (BIS).
Data on GDP from the World Bank [WB]. WB GDP data for 2016 were not publicly available as this was posted.
Note that total GDP for these 4 economies declined from 2014 to 2015.

In this post I also present a closer look at developments in energy consumption and total debts [private and public] for China, Italy, Japan, Spain, United Kingdom and USA.

As of 2016 these 6 countries had about 47% of the total global energy consumption and 42% of the total global petroleum consumption.

As the private sector debt growth slowed/reversed the public sector took over and it appears that public debt growth is not as potent to stimulate growth in energy consumption [and possibly GDP], but sustains or slows the decline in total energy consumption.

Part of the explanation for this may be that much  of the increased public deficit spending is directed towards social programs (more unemployment benefits etc.) which at best may sustain demand.

The 6 countries are presented in the sequence of how I perceive how far they are into the debt deleveraging cycle.

There are other forces at play here as well, as oil companies entered into a bet that high oil prices would be sustained by consumers continuing to have access to credit/debt, which would allow the oil companies in an orderly manner to retire their steep growth in debts required to develop the costlier oil. The debt fuelled growth in investments gradually created a situation where supplies ran ahead of demand, thus collapsing the oil price in 2014.

To me the sequence of events is:

Changes in credit/debt => Changes in energy consumption => Changes in GDP

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Status of Norwegian Natural Gas at end of 2015 and Forecasts towards 2025

In this post I present actual Norwegian natural gas production, status on reserves, the development in discoveries and what this results for Norwegian Petroleum Directorate (NPD) and my expectations for the future delivery potential for Norwegian natural gas.

Norway, after Russia, has been and is the EU’s second biggest supplier of natural gas.

Norway is the third largest gas exporter in the world. In 2015, Norway exported about 114 Gcm (Bcm) gas, mainly to other countries in Europe.

Included is also a brief look at developments in actual consumption and production of natural gas in the 28 members of the European Union (the EU 28).

  • NPD in their most recent forecast further revised down and narrowed their band for future delivery potential with about 10 Gcm/a (Bcm/a) by 2025 and pushed forward the start of decline one year relative to their previous forecast.
  • I now expect the Norwegian delivery potential for natural gas relative to 2015 to decline by more than 40% by 2025.
  • Europe will increasingly have to rely on natural gas imports from more distant sources and should by now have defined policies for the role natural gas will have in its future energy mix.

This post is an update to my post in 2015 looking at the status as of end 2014.

Figure 1: The chart above shows development in natural gas exports from production installations on the Norwegian Continental Shelf (NCS) as reported by the Norwegian Petroleum Directorate (NPD) from 1996 to 2015 and with my forecast for delivery potential towards 2025. The chart also shows the band of NPD forecasts; green line upper projection, orange line lower projection. NPD’s central projection is in about the middle of the green and orange lines. The black dotted line is the forecast from the International Energy Agency’s World Energy Outlook 2012 (IEA WEO 2012). Numbers are believed to be gross exports from the production installations and thus not adjusted for “shrinkage” from Natural Gas Liquids (NGL) extraction, primarily at Kollsnes and Kårstø. The NGL extraction reduces total sales gas volumes with around 4% relative to what is exported from the producing installations. Numbers in Gcm, Giga cubic meters (Gcm = Bcm; Billion cubic meters)

Figure 1: The chart above shows development in natural gas exports from production installations on the Norwegian Continental Shelf (NCS) as reported by the Norwegian Petroleum Directorate (NPD) from 1996 to 2015 and with my forecast for delivery potential towards 2025.
The chart also shows the band of NPD forecasts; green line upper projection, orange line lower projection. NPD’s central projection is in about the middle of the green and orange lines.
The black dotted line is the forecast from the International Energy Agency’s World Energy Outlook 2012 (IEA WEO 2012).
Numbers are believed to be gross exports from the production installations and thus not adjusted for “shrinkage” from Natural Gas Liquids (NGL) extraction, primarily at Kollsnes and Kårstø. The NGL extraction reduces total sales gas volumes with around 4% relative to what is exported from the producing installations.
Numbers in Gcm, Giga cubic meters (Gcm = Bcm; Billion cubic meters)

My forecast  and NPD’s forecast at end 2015 are basically identical towards the end of this decade, but differs about the timing for the start of the decline and how steep this will become as from early next decade. My forecast is also tested versus the Reserves over Production (R/P) ratio as of end 2015, refer also figure 2.

At end 2015 the NPD projection of Norwegian natural gas supply potential towards 2025 was revised down.

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Oil, Interest Rates and Debt

At first glance it is hard to see how oil, interest rates and debt are connected. Two of them are human constructs while oil (fossil sunlight), a gift from Mother Nature, took tens of millions of years to process. Oil is an endowment extracted from a confined underground stock and is now the most dense and versatile energy source known to man.

Figure 1: Chart that shows the development of [extraction] cost of oil and interest rates (US 10 Year Treasuries) has developed since 2000 and a likely trajectory for oil extraction costs.

Figure 1: Chart that shows the development of [extraction] cost of oil and interest rates (US 10 Year Treasuries) has developed since 2000 and a likely trajectory for oil extraction costs.

Both lines are SIGNALS, and most likely plan their future based on only one of them.

The 10 Year Treasury (or similar) rate is the reference used for amongst other things to set interest rate for mortgages. Most now, aware of it or not, base their future plans on the expectations to developments of the 10 Year Treasury.

What is now playing out in the oil market may be described as below;

Low interest rates [stimulates debt growth] => Pulls demand forward => Oversupply => Deflation

How will the interest rate develop in the future?

This is important as the present huge global debt overhang weighs heavily in the consumers’ balance sheets and their affordability for costlier oil. It is also important for oil companies’ long term planning to bring costlier oil to the market.

A lasting, low rate makes higher debt loads manageable. Interest rates works both sides of the demand/supply equation.

A higher interest rate will have serious implications for highly leveraged consumers and oil companies.

The dynamics may be described as below:

Higher interest rate => lowers demand => downward pressure on price [deflation] => makes it harder for [highly leveraged] consumers/oil companies to service their debt overhang => lowers investments to develop costlier supplies

At some point in time the present oil supply overhang will come to an end. This will become reflected in a higher price.

The timing of these events creates uncertainties and the agile and financial strong oil companies will sweat out a lasting low oil price.

Few are aware of that the costs of accessing our real capital (like oil) that runs our economies are rapidly increasing.

What is different this time is that the oil price may remain lower for longer than the estimated full cycle break even costs for new developments.

The suggested path for costs is believed in the near term to come down as oil service companies have reduced their prices to shoulder the burden from the recent price collapse. Over time, the capacities of the service companies will become aligned with the demand for their services and products. At some point, as the oil price recovers and investments pick up, the market mechanisms will bring the prices from the service companies up as the service companies also need to make a profit to stay in business.

In figures 4 and 5 are shown how the combination of lower interest rates and a lasting, high oil price encouraged the oil companies to rapidly take on more debt to develop costlier oil on the expectations that consumers had remaining ability to take on more debt/credit to pay for this, thus allowing the oil companies to retire their debts.

The oil companies’ behavior in the recent decade is reminiscent of group think. Few expected the oil price to collapse, though the oil industry itself repeatedly point out the cyclical nature of the oil price.

The aggregate of developments (primarily driven by an amazing growth in the extraction of light tight oil [LTO]) gradually resulted in a supply overhang that made the oil price collapse.

The costs of extracting real capital, like oil, has been rapidly increasing, yet we are making decisions for the future as if it were decreasing, based on the price of capital (money). This is a short term phenomenon that will last until supply and demand become balanced.

The present situation with an apparent oil glut and low prices is a temporary false signal.

This may also be the case with the low interest rates.

The near future will reveal how the competition for available funds to service a still growing huge global debt overhang fare towards the need to fund developments of costlier oil.

Can an increasingly leveraged global economy handle both higher oil prices and interest rates and still remain on its growth trajectory?

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The Oil Price and EMEs growth in Credit and Petroleum Consumption since 2000

In this post I present a closer look at the credit growth for 6 Emerging Market Economies (EME) together with the developments in their and the net oil exporters petroleum consumption for the period 2000 to 2014.

The 6 EMEs are; Brazil, China, India, Indonesia, Malaysia and Thailand.

  • Where did the lion’s share of growth in global petroleum consumption end up since 2000?
  • What was the likely mechanism/vehicle that allowed for this?

This post is an update and expansion to my post “Changes in Total Global Credit Affect The Oil Price”

  • The credit growth for the EMEs was strong in absolute and relative terms (also as a percentage of GDP) since 2009. As from 2013 the EMEs credit growth slowed (decelerated).
  • The EMEs credit growth gained momentum as the big central banks lowered interest rates and started Quantitative Easings (QE), refer also figures 02 and 04.
  • As the EMEs enter debt saturation (little room left on their balance sheets {little remaining quality collateral} to take on more credit/debt) expect this to affect their consumption and their potential to pay for higher priced oil.
  • Potential for continued [global] credit growth will for some time become one of the vital factors that define the sustainable ceiling for the oil price.
  • Demand is what one can pay for. In other words, demand is monetary in nature. Credit acts as money and adds to aggregate demand.
    Credit growth also made it possible to bid up and pay for higher priced oil during the recent years.
  • If the oil price, for whatever combination of reasons, moves to a sustainable higher level, it should be expected that those who are left with limited/no access to more credit will reduce their consumption/demand for oil.

Figure 01: The stacked areas in the chart show the growth in petroleum consumption for the 6 EMEs and the net oil exporters from 2000 to 2014 [2000 has been used as a baseline]. Total growth for the 6 EMEs are shown by the black dotted line. The red dashed line shows the change in total global petroleum consumption since 2000. [These are shown versus the right axis]. The development in the oil price is shown by yellow circles connected by a grey line versus the left axis.

Figure 01: The stacked areas in the chart show the growth in petroleum consumption for the 6 EMEs and the net oil exporters from 2000 to 2014 [2000 has been used as a baseline]. Total growth for the 6 EMEs are shown by the black dotted line.
The red dashed line shows the change in total global petroleum consumption since 2000. [These are shown versus the right axis].
The development in the oil price is shown by yellow circles connected by a grey line versus the left axis.

The chart above shows several interesting developments.

  • The strong growth in petroleum consumption from the 6 EMEs and net oil exporters since 2000.
  • Early in the previous decade the OECD countries also grew their petroleum consumption as a response to central banks’ lowered interest rates that allowed for further credit expansion [kicking the can until there is no more road left].
  • A shift occurred post the Global Financial Crisis (GFC) in 2008.
    The 6 EMEs and net exporters outbid OECD (and others) for a portion of their petroleum consumption.
    (This is shown by the growth in global petroleum consumption [the red dotted line] which since 2008 did not fully meet growth in consumption from the 6 EMEs and net oil exporters.
    The 6 EMEs and the net oil exporters increased their total petroleum consumption with 17.1 Mb/d (from 26.7 Mb/d in 2000 to 43.7 Mb/d in 2014), while global consumption grew by 15.2 Mb/d to 92.1 Mb/d.
  • OECD reduced its petroleum consumption from 48.0 Mb/d (2008) to 45.1 Mb/d (2014).
    OECD countries slowed and/or reversed credit expansion (deleveraged [default is one way to deleverage]) and introduced austerity measures in a bid to manage their credit overhang.
  • The net oil exporters (countries/regions) that saw noticeable growth in their petroleum consumption in the period are; Canada, Mexico, Colombia, Ecuador, Venezuela, Azerbaijan, Kazakhstan, Norway, Russian Federation, Turkmenistan and the regions Middle East and Africa. There are other small net oil exporters like Denmark, Trinidad&Tobago which had small changes to their petroleum consumption.
  • Indonesia became a net petroleum importer as of 2003 and Malaysia as of 2011.

The net oil exporters spent some of the increased revenues from higher priced oil for social programs to improve living standards and as leverage for increased investments to sustain and/or grow oil supplies (which require energy!) for what looked like a sustained growth in demand/consumption that would support a lasting high oil price.

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Written by Rune Likvern

Saturday, 5 September, 2015 at 19:01

World Crude Oil Production and the Oil Price, August 2015

In this post I present some of my observations and thoughts about the developments in the oil price, supply and demand, exchange rates (relative to the US dollar), petroleum stocks and what near term factors are likely to influence the oil price.

  • The price of oil (and other commodities) appears to have been influenced by the central banks’ policies post the GFC of 2008 (Global Financial Crisis, primarily the Fed as the US dollar is the world’s major reserve currency) with low interest rates which allowed for growth in total global credit/debt.
  • As the Fed confirmed its end of QE3 (QE; Quantitative Easing) program by the fall of 2014, the oil price started to decline. This decline became amplified by an oversupply resulting from years of debt fueled high capital expenditures by the oil companies to develop supplies of costlier oil for the market to meet expectations of growth in consumption.
  • With the end of QE3 the US dollar rapidly appreciated versus most other major currencies, which offset some of the decline in the oil price in most economies (oil is priced in US dollar), the exceptions being the US and China (which has its currency pegged to the US dollar).
  • Demand and consumption of oil (actual data so far only for the US) responded to the price collapse by some growth. However the world’s growth has not been sufficient to close the gap between supplies and consumption, thus sustaining a downward pressure on the oil price.
  • The oil price collapse motivated oil companies with low variable costs (OPEX) to compensate some of the loss of cash flow by increasing their production (volumes), thus creating a dynamic where growing supplies went looking for demand.
  • The oil price collapse and a period with a favorable contango spread incentivized a strong build in stocks and as stocks remain at elevated levels, it may take some time before stocks return to “normal” levels.

Figure 1: The chart above shows the developments in the oil price [Brent spot, black line. The red line is the smoothed one year moving average] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy relies heavily upon. The financial system is virtual and thus highly responsive. NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.

Figure 1: The chart above shows the developments in the oil price [Brent spot, black line. The red line is the smoothed one year moving average] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy relies heavily upon. The financial system is virtual and thus highly responsive.
NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.

The big unknown is how demand will develop. A global economy struggling with too much debt while running out of quality collateral will at some point experience the drags from growth in the services of the growing total debt. Continued growth in global credit/debt will increasingly be directed towards the services of the growing total amount of debt (kicking the can down the road as the economic productivity from additional credit/debt diminishes).

  • As growth in global credit/debt slows, comes to halt or deleveraging sets in, this will affect demand and prices, also for oil.

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Changes in Total Global Credit Affect The Oil Price

In some posts on Fractional Flow I have presented some of my explorations of any relations between the oil price, changes to global total credit/debt and interest rates. My objective has been to gain and share some of my insights of how I see the economic undertows that also influences the price formation for crude oil.

I have earlier asserted;

  • Any forecasts of oil (and gas) demand/supplies and oil price trajectories are NOT very helpful if they do not incorporate forecasts for changes to total global credit/debt, interest rates and developments to consumers’/societies’ affordability.

In this post I present results from an analysis of developments to the annual changes in total debt in the private, non financial sector of some Advanced Economies (AE’s), and 5 Emerging Economies (EME’s) from Q1 2000 and as of Q3 2014 with data from the Bank for International Settlements (BIS in Basel, Switzerland).

The AE’s are: Euro area, Japan and the US.

The 5 EME’s are: Brazil, China, India, Indonesia and Thailand which in the post are collectively referred to as “The 5 EME’s”.

Year over year (YOY) changes in total private debt for the analyzed economies were juxtaposed with YOY changes in total petroleum consumption in these based upon data from BP Statistical Review 2014.

  • As the AE’s slowed growth in, and/or deleveraged their total private debt after the Global Financial Crisis (GFC) in 2008/2009, the EME’s continued their strong growth in total private debt and China accelerated it significantly in 2009.
  • The AE’s petroleum consumption declined noticeably as from 2007, resulting from the combination of high oil prices and tepid debt growth and/or deleveraging.
  • The EME’s remained defiant to high oil prices and continued their strong growth in petroleum consumption, which likely was made possible by strong growth in total private debt.
  • Demand remains what the consumers can pay for!

All debts counts, household, corporate, financial and public (both government and local) and exerts an influence on economic performance (GDP, Gross Domestic Product).

A low interest rate allows for growth in total debt and eases services of the growing total debt load.

Figure 01: The chart above shows the developments in the oil price [Brent spot, black line] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy heavily relies upon. The financial system is virtual and thus highly responsive. NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.

Figure 01: The chart above shows the developments in the oil price [Brent spot, black line] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy heavily relies upon. The financial system is virtual and thus highly responsive.
NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.

Read the rest of this entry »

The Powers of Fossil Fuels

In this post I present a brief perspective spanning two centuries of the history of energy and mainly fossil fuels (FFs) consumption. Then a brief look at the recent years growth in solar and wind (renewables) and how their growth measures up against FFs since 1990.

Figure 1: The chart above shows the developments in the world’s total energy consumption split on sources as from 1800 and into 2013. The chart has been developed in a joint between Dr Nate Hagens and me.

Figure 1: The chart above shows the developments in the world’s total energy consumption split on sources as from 1800 and into 2013. The chart has been developed in a joint effort between Dr Nate Hagens and me.

In the early 1800s biomass (primarily wood) were humans’ primary source for exogenous energy. Coal became increasingly introduced into the energy mixture after the successful development and deployment of the steam engine which gave birth to the Industrial Revolution. Coal is a nonrenewable, abundant and a denser energy source than wood. The growing use of biomass had led to deforestation in those areas serving energy intensive industries like mining and metals. The steam engine and its use of abundant coal as an energy source made it possible to rapidly expand the industrial production, create economic growth, thus the Industrial Revolution was in reality a revolution made possible by fossil fuels. With the most recent discoveries and introduction of fossil oil and natural gas there appeared to be several abundant sources of volumetric dense energy that could entertain exponential and illusive economic growth. Fossil fuels represent natures’ legacy stock of dense energy (ancient sunlight) that during some decades has been subject to an accelerated depletion. Several reports in the media may now leave the impression that we are at the threshold for a smooth transition from FFs to renewables (solar and wind). However, how does this measure up against hard data? Read the rest of this entry »

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