FRACTIONAL FLOW

Fractional flow, the flow that shapes our future.

Archive for the ‘Norwegian economy’ Category

World Crude Oil Production and the Oil Price

In April 2012 I published this post about World Crude Oil Production and the Oil Price (in Norwegian) which was an attempt to describe the developments in the sources of crude oils (including condensates), tranches of total life cycle costs (that is [CAPEX {inclusive returns} + OPEX] per barrel  of oil) and something about the drivers for the formation of the oil price.

Rereading the post and as time passed, I learnt more and therefore thought it appropriate to revisit and update the post as it in my opinion contains some topics from what I have observed, learned and discussed that have been given poor attention and appears poorly understood.

I will continue to pound the message that oil prices are also subject to the reality of;

  • “Demand is what the consumers can pay for!”

Figure 1: The chart above shows the developments in the oil price [Brent spot] and the time of central banks’ announcements/deployments of available tools to support the global financial markets which the economy heavily relies upon. The financial system is virtual and thus highly responsive. The chart suggests causation between FED policies and movements to the oil price.

Figure 1: The chart above shows the developments in the oil price [Brent spot] and the time of central banks’ announcements/deployments of available tools to support the global financial markets which the economy heavily relies upon. The financial system is virtual and thus highly responsive.
The chart suggests causation between FED policies and movements to the oil price.

The four big central banks, BoE, BoJ, ECB and the Fed expanded their balance sheets with $6 – 7 Trillion following the Lehman collapse in the fall of 2008. These liquidity injections are about to end.

Since 2008 most of the advanced economies’ credit expansions originated from the central banks, the lenders of last resort. Central banks are collateral constrained.

The consensus about the oil price collapse during the recent weeks is attributed to waning global demand and growth in  supplies.

All eyes are now on OPEC.

  • 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.

For more than a decade, I have carefully studied the forecasts (and been involved in numerous fruitful [private] discussions) from authoritative sources like the Energy Information Administration (EIA) and the International Energy Agency (IEA) including the annual outlooks from several of the major oil companies and I did NOT find that any of these takes into consideration changes to global credit/debt [growth/deleveraging], levels of total global credit/debt and interest rates.

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A CLOSER LOOK INTO THE DRIVERS OF THE NORWEGIAN ECONOMY’s RECENT GROWTH SUCCESS

In this post I present some hard data from the Norwegian economy, which in the recent decades show high correlations between total debt growth and the oil price. Presently the total debt growth from some sectors runs at an annual rate above 8% of GDP.

I also present my thoughts and observations about historical developments and what may lie ahead.

The economic undertows now suggest for a sharp downturn in the Norwegian economy. A deep look into the public data from Statistics Norway (SSB) reveals that it was the growth in debt, primarily acquired by the Norwegian households, that was and still continues to be a major and less acknowledged contributor to the recent growth success of the Norwegian economy.

The primer for the strong nominal growth in debt was likely the growth in the oil price starting back in 2004. The oil price has remained at a structurally higher level at around $100/bbl.

Developments in the Norwegian economy have been tightly linked to movements of the oil price and the value of petroleum exports.

  • It is widely recognized that the growth in the oil price spurred more investments for exploration and developments for petroleum from the North Sea.
  • With the increased Norwegian North Sea petroleum activities followed an acceleration in households, non financial and municipalities debt growth.

Figure 1: The stacked columns in the chart above show the development in the 12 Months Moving Totals (Annualized) for Norwegian exports split on petroleum (oil, condensates and natural gas [green columns]) and exports exclusive of petroleum [black columns]. The orange line shows the development in the 12 Months Moving Totals (Annualized) for total imports and the pink line the 12 Months Moving Totals (Annualized) for the trade balance. 6 NOK ~ 1 USD By clicking on the chart a bigger version opens in a new tab/window (goes for all the charts in this post).

Figure 1: The stacked columns in the chart above show the development in the 12 Months Moving Totals (Annualized) for Norwegian exports split on petroleum (oil, condensates and natural gas [green columns]) and exports exclusive of petroleum [black columns]. The orange line shows the development in the 12 Months Moving Totals (Annualized) for total imports and the pink line the 12 Months Moving Totals (Annualized) for the trade balance.
6 NOK ~ 1 USD
By clicking on the chart a bigger version opens in a new tab/window (goes for all the charts in this post).

Norway had a long history of running a balanced trade account and with increased incomes from petroleum exports during the recent decades, a big trade surplus.

As the data on imports are not broken down by sectors, there is good reason to believe that a major portion of the import growth originates from purchases of goods and services for the petroleum industry.

The value of Norwegian petroleum exports is now expected to decline in the near term with the decline in production, primarily of crude oil and by the end of this decade also natural gas.

Anyhow the data were whipped around for confessions, it turned out the Norwegian economy now appear to approach a major turn around.

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