FRACTIONAL FLOW

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The Powers of Fossil Fuels, an Update with Data per 2017

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This post is an update and small expansion of The Powers of Fossil Fuels spanning more than two centuries of the history of the world’s energy, primarily fossil fuels (FF), consumption.

  • Between 2002 and 2017 world energy consumption grew with about 39%, world Gross Domestic Product (GDP) by 130% and world total debts by more than 160% (market value and expressed in US dollars).
  • The narrative of the growth story of the world economy (GDP) appears as a rule to leave out two participants:
    1. DEBT and the accelerating debt growth since the 1980’s, more notably since the start of this millennium and how this unprecedented growth in total world debt helped pull forward ENERGY demand.
      Post the Global Financial Crisis (GFC in 2008/2009) the continuity of economic growth became facilitated by concerted policies by the world’s major central banks by their low interest policies and Quantitative Easings (QE).
      Lower interest rates allowed room for more DEBT on most balance sheets and growth in total DEBT is important for continued economic growth.
    2. ENERGY (and primarily FFs) consumption and its strong growth facilitated by the rapid growth in DEBT.
  • Simplistic explained is GDP a monetary measure of the annual volume of transactions.
    These transactions involve the exchange of products and services which require some input of ENERGY and in recent years growing amounts of DEBT allowed for this to happen.
    This illustrates that money/currency is a claim on ENERGY.
    The orderly retirement of the growing DEBT is a claim on future ENERGY.
  • This post also takes a brief look at the recent years’ growth in solar and wind (renewables, RE) and how their growth measured up against FFs since 1990 and Year over Year (YoY) changes for FF and RE since 2000.

Figure 1: The chart shows the developments in total world energy consumption split on sources as of 1800 and per 2017.
Energy sources are stacked according to when these were introduced into the world’s energy mixture.
The black line (plotted versus the left hand scale) shows development in the world’s GDP in current US dollars since 1980 based on data from the International Monetary Fund (IMF).

In the early 1800s biomasses (primarily wood) were humans’ primary source for exogenous energy. Coal was gradually 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 biomasses 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 and thus the Industrial Revolution was 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 debt fueled 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 RE (solar and wind).

How does this measure up against hard data for RE (solar and wind) versus FFs?

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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.

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The Contango Spread Supports The Oil Price And Results In Strong Stock Building

As analysts and pundits keep staring into their crystal balls searching for clues to future moves in the oil price, it may be more helpful to look at some actual developments that may explain the recent strong US stock builds, developments in US total petroleum consumption and what this now may presage about future oil price movements.

In this post I present a closer look at the recent growth in US total petroleum demands split into:

  • Development in US total petroleum consumption (inclusive some selected products)
  • Rate of stock build of US commercial crude oil stocks

Then a look at developments in crude oil supplies from OPEC where several of the big oil producers in the Middle East have had strong growth in the number of oil rigs since early 2014. Recent media reports about increases in oil supplies from the biggest Middle East oil producer.

Figure 01: The chart above shows developments in the oil price (Brent spot), blue line and left hand scale [The oil price has been multiplied by 4 to fit the scaling on the left hand scale]. The thick black line shows the weekly EIA reported total inventory of US commercial crude oil stocks, left hand scale. The thin gray line plotted versus the right hand scale shows the daily changes to crude oil inventories from weekly EIA data. The thick red line plotted versus the right hand scale is a trailing 28 days moving average of changes to the crude oil inventories. Stock draw downs adds to supplies and may moderate price growth for some time. Figure 02 has zoomed in on the recent developments.

Figure 01: The chart above shows developments in the oil price (Brent spot), blue line and left hand scale [The oil price has been multiplied by 4 to fit the scaling on the left hand scale]. The thick black line shows the weekly EIA reported total inventory of US commercial crude oil stocks, left hand scale.
The thin gray line plotted versus the right hand scale shows the daily changes to crude oil inventories from weekly EIA data.
The thick red line plotted versus the right hand scale is a trailing 28 days moving average of changes to the crude oil inventories.
Stock draw downs adds to supplies and may moderate price growth for some time.
Figure 02 has zoomed in on the recent developments.

In Q1 2014 the average daily US stock build was 0.29 Mb/d and during Q1 2015 the average US daily stock build was 1.10 Mb/d.

Demand for US stock build was up 0.8 Mb/d year over year. This stronger stock build temporarily adds to (global) demand and supports the oil price.

What drives this strong stock build is the price spread between contracts for prompt/front month deliveries versus contracts for later deliveries when the futures curve is in what is referred to as contango, refer also figure 3.

The recent strong builds in US crude oil storage may give away some clues about underlying developments in consumption.

Demand = Consumption + Stock changes = Supplies

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Are We In The Midst Of An Epic Battle Between Interest Rates And The Oil Price?

What follows are the continuance of my research, discussions, observations and thoughts around the nexus of debts, interest rates and the oil price.
I now believe these relations are poorly understood and with total global debt levels at all time highs (and growing), years of low interest rates, which are kept low (by concerted efforts by central banks) while the oil price in recent months has collapsed may hide a SIGNAL that struggles with attention from too much noise.

  • A collapsing oil price while interest rates remain low is likely the proverbial canary.

Global Crude Oil Supplies, The Oil Price And Interest Rates

Figure 1: The green area [left hand axis] in the chart above shows the world’s development of crude oil and condensates supplies between 1980 and 2013. The pink line shows the development in the interest rate (yield) for US 10 Year Treasuries [right hand axis]. The price of oil (Brent), black line nominal, yellow line inflation adjusted in $2013 [both right hand axis]. NOTE: The oil price has been divided by 10 to accommodate it on the same scale as the interest rate [right hand axis]. The US 10 Year Treasury (US10T) interest rate has been in decline and is presently around 2.0%.

Figure 1: The green area [left hand axis] in the chart above shows the world’s development of crude oil and condensates supplies between 1980 and 2013.
The pink line shows the development in the interest rate (yield) for US 10 Year Treasuries [right hand axis].
The price of oil (Brent), black line nominal, yellow line inflation adjusted in $2013 [both right hand axis].
NOTE: The oil price has been divided by 10 to accommodate it on the same scale as the interest rate [right hand axis].
The US 10 Year Treasury (US10T) interest rate has been in decline and is presently around 2.0%.

Cause and effects amongst the oil price and interest rates are of course subject to (some informed and gripping) discussions.

  • The price of oil appears to have been the leading indicator.
  • Any (small) increase to the interest rate now will likely affect demand for oil and thus its price, thus further slowing investments for new supplies.

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The Crude Oil Price and Changes to Total Global Private Credit/Debt

This is another installment of my work in progress about credit, interest rates and the oil price. Though many of the mechanisms for some time (as in several years and in some circles) have been well understood, nothing beats having the cover of data/reports from authoritative sources.

In this post I present the observations and results from the research of the developments in some selected OECD countries and emerging economies (non OECD) in their petroleum consumption together with the relative developments in their total non financial debt since 1999.

This may put into context how emerging economies were able to grow their petroleum consumption as the oil price grew and remained high. Likewise provide some insights into some of the mechanisms at work that caused a decline in petroleum consumption for the selected OECD countries.

The selected countries presented and the world had the following changes in their total petroleum consumption between 2005 and 2013 based upon data from BP Statistical Review 2014:

OECD countries:  – 4.04 Mb/d (decline)

Emerging economies: 8.39 Mb/d (growth)

Growth in world petroleum consumption: 6.94 Mb/d

The numbers illustrate that the emerging economies’ total growth in petroleum consumption was greater than the world’s from 2005 to 2013. These emerging economies effectively bid out OECD for a portion of its consumption to meet its own growing demand.

·         How was this accomplished?

·         Were the emerging economies about to decouple from the advanced economies?

·         What caused petroleum consumption for the OECD countries to decline?

I set out to explore what could be the likely causes by looking into the relative changes in total non financial debt of these countries armed with data from the Bank for International Settlements (BIS, in Basel, Switzerland) placed together with the changes in their petroleum consumption as from the end of 1999 with data from BP Statistical Review 2014.

It turns out that changes in petroleum consumption for these countries closely follow relative changes to total private non financial debts. Then add changes in sovereign/public debt.

Demand is not what one wants, but what one can pay for.

And expectations for demand drives investments for supplies.

Credit is a vehicle which allows for demand to be pulled forward in time and to some extent negates any price growth and allows for investments to meet expected demand changes.

Credit works both sides of the demand and supply equation.

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THE REVIVAL OF MOUNTRAIL’s ”OLD” SWEET SPOTS

This post is an update and slight expansion of my previous post In Bakken (ND) it is now mostly about McKenzie County about developments in light tight oil (LTO) extraction in the Bakken/Three Forks formations in North Dakota.

It also includes a little about developments in LTO extraction from Bakken/Three Forks in Elm Coulee, Montana.

Harsh winter weather affected additions of producing wells and also caused a total estimated 300 additional producing wells (relative to entering winter) to be shut in with different durations. The total effects from well additions that was below what was estimated to sustain a level production, and the high number of wells shut in caused total LTO extraction to move sideways last winter, with a small dip during December and January.

Figure 01: The chart above shows development for annual tight oil extraction from the Bakken/Three Forks formations in North Dakota [green area and rh scale]. The black line shows development in the interest for the US 10 - Year Treasury [lh scale].

Figure 01: The chart above shows development for annual tight oil extraction from the Bakken/Three Forks formations in North Dakota [green area and rh scale]. The black line shows development in the interest for the US 10 – Year Treasury [lh scale].

Interest rates had for some time been on a downward trajectory and the extraction of tight oil from Bakken/Three Forks started to grow while interest rates continued to be lowered and the Fed and other central banks started their rapid expansion of their balance sheets. Assisted with a tighter global supply/demand balance the oil price moved higher.

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GLOBAL CREDIT GROWTH, INTEREST RATE AND OIL PRICE – ARE THESE RELATED?

For some years my general understanding has been that the price formation for most commercial traded materials/products/items (including oil, which is paramount for all economic activities) is very much related to credit/debt growth, total debt levels and the interest rate (the price of money which also is a measure of credit risk).

In an effort to continue economic growth (to save the system and avoid the mother of all deflations) the worlds leading central banks (US Federal Reserve [FED], the most important one as the US dollar also serves as the world’s reserve currency, Bank of England [BoE] and will the European Central Bank [ECB] soon follow?) in recent years resorted to quantitive easing (QE) and lowered interest rates to almost zero to ease the burden from growing total debt loads. QE was intended to be a temporary measure.

The central banks (CB) actions appear to be a lot about preserving wealth ({inflating} assets) while there is little they can do about nature’s CAPITAL, like energy stocks (most importantly fossil fuels).

The CBs likely pursued these measures as they had few other good alternatives. It appears that the CBs policies may also have influenced the oil markets and helped shape the oil companies’ strategies to deal with a tighter supply/demand balance since 2005 by encouraging them to take on more debt and go after the more “expensive” oil.

The world has also become more complex, interconnected and continued good growth in its Gross Domestic Product (GDP) post the global financial crisis.

CBs do not have the capabilities to create cheap, abundant and lasting energy supplies. For some limited time the world’s CBs and their policies may have alleviated (and for some time continue to) some of the effects of the growth in oil/energy prices, though this was likely not their primary objective when they deployed their policies.

WHAT SUPPORTED GROWTH IN OIL DEMAND AND PRICE FORMATION?

Econ 101 refers to the law of supply and demand as the price arbitrator for raw materials, goods and services. The credit/debt will be assumed and mortgaged against promises to honor it in the future and pay interest.

One understanding of our economies is to view them as thermodynamic flows where money is the facilitator that brings energy/thermodynamic flows to and allocate these within the economies.

During the recent decades, growth in credit/debt (borrowing from the future) grew aggregate demand and to some extent negated the price growth induced from demand growth.

The recent years continued growth in credit/debt was stimulated by lowering the interest rate. By keeping interest rates low, less revenues/funds were needed to service the consequences of the growth in total debts, and thus allowed for continued deficit spending and thus support economic activities at elevated levels.

In March 2014 the Bank for International Settlements (BIS in Basel, Switzerland) published a paper titled Global liquidity: where it stands, and why it matters (pdf file, 200 kB) which presented some interesting data and observations about developments in global bank credit/debt levels.

Figure 01: The 6 panel graphic above shows global bank credit aggregates and the most important borrower regions. The chart at upper left shows that global bank credit more than doubled from 2000 to 2013. In the US [upper middle chart] the growth in bank credit slowed from around 2007 (the subprime/housing crisis) and overall credit growth was continued by increased public borrowing for deficit spending. In the Euro area [upper right chart] the total debt levels led to a slowdown in growth of bank credit post 2008 (or the Global Financial Crisis; GFC) and more recently it appears as deleveraging has started [default is one mechanism of deleveraging]. In the Euro area petroleum consumption is now  down around 13% since 2008. Asia Pacific [lower left chart] which includes China, continued a strong credit growth and thus carried on the global credit growth. Latin America [lower middle chart] which includes Brazil, continued together with Asia Pacific the strong total global credit growth. Global GDP in 2013 was estimated at above $70 trillion.

Figure 01: The 6 panel graphic above shows global bank credit aggregates and the most important borrower regions. The chart at upper left shows that global bank credit more than doubled from 2000 to 2013.
In the US [upper middle chart] the growth in bank credit slowed from around 2007 (the subprime/housing crisis) and overall credit growth was continued by increased public borrowing for deficit spending.
In the Euro area [upper right chart] the total debt levels led to a slowdown in growth of bank credit post 2008 (or the Global Financial Crisis; GFC) and more recently it appears as deleveraging has started [default is one mechanism of deleveraging]. In the Euro area petroleum consumption is now down around 13% since 2008.
Asia Pacific [lower left chart] which includes China, continued a strong credit growth and thus carried on the global credit growth.
Latin America [lower middle chart] which includes Brazil, continued together with Asia Pacific the strong total global credit growth.
Global GDP in 2013 was estimated at above $70 trillion.

Private and public debt growth through the recent decades added support for the increased oil consumption and negated the effects of higher prices caused by a tight supply/demand balance. In recent years the consumers (private sector) in many Western countries are at what appears as debt saturation, and several sovereigns are trying to carry on the overall debt growth through increased  public borrowing and deficit spending, albeit at lower levels.

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