FRACTIONAL FLOW

Fractional flow, the flow that shapes our future.

Posts Tagged ‘FED

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.

Read the rest of this entry »

CENTRAL BANKS’ BALANCE SHEETS, INTEREST RATES AND THE OIL PRICE

In this post I present a more detailed look at developments in central banks’ balance sheets, interest rates and the oil price since mid 2006 and as of recently.

Paper and digital money are human inventions. Most people truly believe it is money that powers the society and their lives because they have never had reason to think otherwise. Money does not create energy, but it allows for faster extraction from stocks of energy (like fossil fuels) and influences consumers’ affordability of energy.

It is humans’ ability to use external energy that gives humans leverage over other animals. The financial system in general does not recognize oil for what it is, it treats it like another commodity.
We (the aggregate human hive) moved to use more financial debts as a way of pulling resources for consumption (like oil) forward in time when Limits To Growth (LTG) was written. In recent years global credit/debt creation went exponential. The workings of financial debts (created “ex nihilo”) was not included in LTG and the effects of debts are rarely recognized when Gross Domestic Product (GDP) is estimated and its future trajectory projected.

This post takes a closer look at the question:
•   “Could the cumulative effects of the strong growth in oil prices starting back in 2004, which signaled a tighter oil supply/demand balance, upon working their way through the economies, have contributed to forcing the central banks’ to deploy their tools of lower interest rates and growing their balance sheets – measures which have mitigated some of the effects of higher priced oil?”
It is recommended to read this post as an extension to my post “Global Credit growth, Interest Rate and Oil Price – are these related?” where I showed that apparently something fundamentally changed in previous mid decade.

Data from the big western central banks, US Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BoE) and Bank of Japan (BoJ) have been lifted from the article “Chart Of The Day: The Fed (And Friends) $10 Trillion Visible Hand” which recently was published by Tyler Durden at ZeroHedge.

Figure 1: The chart above is a composite of two charts. The bottom chart shows the developments for the total central banks’ assets on the balance sheets and the interest rate for Federal Reserve [Fed], European Central Bank [ECB], Bank of England [BoE] and Bank of Japan [BoJ]. Developments in total central banks’ assets in US$ Trillion are shown by the green line and plotted versus the outer right hand scale.  Developments in the interest rate (%) are shown by the dark blue line line and plotted versus the inner right hand scale.  On top of the chart and with synchronized time axes is overlaid the development in the oil price (US$/Bbl, Brent spot), red line and plotted versus the left hand scale.

Figure 1: The chart above is a composite of two charts. The bottom chart shows the developments for the total central banks’ assets on the balance sheets and the interest rate for Federal Reserve [Fed], European Central Bank [ECB], Bank of England [BoE] and Bank of Japan [BoJ].
Developments in total central banks’ assets in US$ Trillion are shown by the green line and plotted versus the outer right hand scale.
Developments in the interest rate (%) are shown by the dark blue line line and plotted versus the inner right hand scale.
On top of the chart and with synchronized time axis is overlaid the development in the oil price (US$/Bbl, Brent spot), red line and plotted versus the left hand scale.

Since the start of the global financial crisis (GFC) in 2008 the western central banks (Fed, ECB, BoE and BoJ) have grown their total assets above $10 Trillion and added around $7 Trillion to their balance sheets in the last 7 years.

The overlay with the developments in the oil price on the chart with central banks’ (CBs) balance sheets and interest rate (ref also figure 1), creates the impression that massive CBs liquidity injections and considerable cuts to the interest rate renewed the support for the oil price after it collapsed from its high in the summer of 2008.

The oil price has remained fairly stable since 2011 (around US$110/Bbl) as the western central banks continued to expand their balance sheets at an annual average rate of around US$1 Trillion and kept interest rates low. Then add the expansive credit/debt creation of other big economies, like Brazil and China, during this same period.

Read the rest of this entry »

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.

Read the rest of this entry »

%d bloggers like this: