Research Dept. News
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Monthly Report, num 350 - October 2011
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International review
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IMF forecasts
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IMF forecasts: risk of a double dip recession
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The IMF expects 4.0% world growth for 2011 and 2012, with a significant risk of this being lower.
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In its World Economic Outlook for September, the International Monetary Fund (IMF) sees a weaker and more uncertain recovery, with greater fiscal and financial risks for advanced economies. Global growth for 2011 has been reduced to 4.0%, a rate that will not vary in 2012, clearly below July's forecasts. The recovery is uneven, with some advanced economies that, according to the Fund, will grow less than 2.0% in 2011 and 2012 and with some emerging economies for which, although their growth has also been revised downwards, the risk of a slowdown is less, with advances that will probably exceed 6.0% this year and the next.
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Private demand still fails to take over from public stimuli in advanced economies.
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According to the IMF, the world economy is being afflicted by a twofold imbalance, internal and external. With regard to the former, it's vital for private demand to take over from fiscal stimuli, which is not happening in advanced economies because of a shortage of credit and the legacy of real estate bubbles. With regard to the external imbalance, while advanced economies such as the United States have to correct their trade deficits and increase their exports, emerging economies such as China need to focus on strengthening their domestic demand to reduce external surpluses.
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The United States' growth is revised downwards to 1.5% in 2011 and 1.8% in 2012.
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The risks are likely to reduce growth. The main risk is the European sovereign debt crisis spiralling out of control. Fiscal and financial uncertainty is affecting countries such as the United States and Japan, with low growth prospects that foster doubts regarding the sustainability of their debt. In this respect, the Fund wants advanced economies, particularly the United States, to strike a prudent balance between stimuli for demand and a credible medium-term fiscal consolidation plan that ensures the sustainability of the public accounts.
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The economy whose growth has been revised downwards the most is the United States. The lack of political consensus, persistently weak employment and housing and the danger of excessive reticence on the part of consumers mean that, although greater growth is expected for the second half of the year, the advance forecast for the whole of 2011 remains at a meagre 1.5%, with 1.8% expected for 2012.
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The euro area slows up. Germany, strong in 2011, will lose speed in 2012. Spain grows by 0.8% in 2011 and 1.1% in 2012.
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For its part, the euro area expects to grow by 1.6% in 2011, but in 2012 a slowdown is forecast with 1.1% growth. Expectations for Germany have also cooled down, with growth forecast at 2.7% for 2011, which should slow up to 1.3% in 2012. For Spain, the forecast of 0.8% growth in 2011 has been maintained. However, in 2012 the recovery will be more lukewarm than expected, with 1.1% growth forecast due to lower demand on the part of its trading partners.
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Japan recovers from its earthquake while China and emerging Asia continue to lead world growth.
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Japan should fall to 0.5% in 2011 but reconstruction after the effects of the earthquake and tsunami should raise growth to 2.3% in 2012. The outlook for emerging economies is still robust, particularly East Asia with the outstanding example being China's growth which, according to the IMF, will remain strong and advance by 9.5% in 2011 and 9.0% in 2012, while the economies of Eastern Europe and Latin America will continue to grow but somewhat less than the Asian countries. Similarly, inflationary risks should be eased by less upward pressure from commodity prices.
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United States
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The United States: the road to recovery is long and narrow
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The United States has insufficient growth.
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The United States' economy is weak. The private sector is still failing to take over from the expansionary measures that avoided a depression and took growth for the whole of 2010 to 3.0%. The quarter-on-quarter growth in gross domestic product (GDP) for the first two quarters of 2011 was 0.1% and 0.3%, respectively. This tone is expected to improve for the second half of the year thanks to the relaxation of temporary factors that hampered growth, such as oil prices. Nonetheless, growth for the whole of 2011 is unlikely to exceed 1.6%.
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Unemployment, indebtedness and the housing market hamper the recovery.
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Although the latest indicators do not point to a double dip recession, the risk is still that growth will be lower than expected and the underlying problems have not altered. Persistently high unemployment and continual losses in the housing sector are hitting the middle class particularly hard as, in debt, it is seeing the purchasing power of its income and wealth diminish. The purchasing power of the average household income is 7.1% below the level of 1999 and housing prices have yet to pick up. For its part, the gross indebtedness of households stood at 114.3% of disposable income in the second quarter, now far from the peak reached of 130.2% in September 2007 but still above the normal level. These factors mean that growth will remain weak throughout 2012, so we predict a growth rate of 2.0%.
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Private consumption should pick up slightly in the third quarter.
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The hardships of Joe public are reflected in consumption, namely the expectations for public and the weakness of private consumption, whose growth in the third quarter should nonetheless pick up a little. This improved tone is due to July's increase, although this improvement is unlikely to increase further, as the reaction was centred mostly on consumer durables while the consumption of services and non-durable goods, which are more indicative of the underlying trend, is still stagnant. Retail sales in August also showed a clear slowdown compared with the good month of July, with automobiles losing a large part of what they had gained.
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In the case of surveys, in August the Conference Board consumer confidence index fell drastically. This drop is partly due to the uncertainty caused by negotiations to raise the legal debt ceiling in order to avoid default but the downward trend in future expectations is getting worse, in August coming close to the record lows of early 2009. Entrepreneurs, who started 2011 optimistically, have also gradually darkened their perceptions, with a business sentiment index from the Institute for Supply Management in August that is consistent with the current low rates of growth.
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Little leeway for expansionary policies.
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The problem for the coming years is that the leeway for expansionary measures has narrowed. With regard to monetary policy, interest rates are already at minimum levels and the Fed must opt for exceptional measures such as the purchase of public debt or, as announced this September, extending the maturities of its assets, selling 400 billion dollars in bonds with maturities of up to three years and buying other longer term bonds: measures whose effect on growth is limited.
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A fiscal consolidation plan combined with short-term stimuli is required.
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But the greatest challenges lie in the area of fiscal policy. The authorities' priority must be to design a credible agenda for fiscal consolidation. A task that the United States, with a gross public debt that will reach 100% of GDP in 2011, has been slow to undertake compared with other advanced economies. A context that, should the debt's sustainability be assured, would allow the authorities to implement temporary stimuli to support the recovery more decisively. One example of the prevailing disagreement in this respect is the lack of agreement regarding President Obama's plan to boost employment. This plan proposes an injection of 447 billion dollars through reductions on income tax and on small firms, which would be offset by higher taxes on high income brackets. The plan's net effect would stimulate GDP by 1.5% in 2012, but is unlikely to be passed in its entirety.
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Looking in detail at the labour market, August's unemployment rate remained at 9.1%, but is likely to come close to 9.5% in 2012, given the weak growth forecast. Similarly, the big pool of discouraged workers and those working part-time involuntarily will absorb a large number of the jobs that may be created. Recovery in the labour market is key to the fortunes of the middle class improving. A rise in nominal income would help to improve households' gross debt-disposable income ratio and boost consumption. Employment has an effect on income via two mechanisms: wages and the activity rate.
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The recovery in wages slows up and the rate of activity is below its secular trend.
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But the recovery's loss of steam is also being felt by wages. The average weekly wage rose by 1.7% year-on-year in August, a rate that entails a loss of purchasing power and reveals a clear slowdown since the 3.7% of August 2010, when the economy was growing faster than now. With regard to the activity rate, the ratio between the employed workforce and the population, an exceptionally high number of jobs were lost during the crisis and the recovery is exceptionally weak, with zero net job creation in August. Consequently, the activity rate is still falling, standing at 44.6% in July, the lowest since 1984, far from the 48.2% of December 2007 and even further from the long-term trend.
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Persistently weak employment and income are prolonging the surplus supply of housing, which might continue beyond the end of 2013. In this respect, housing prices have yet to bottom out, with the Case-Shiller index of second-hand housing for the 20 most significant areas in June falling again, albeit by a minimal amount of 0.1%. Supply still shows no signs of life, with the number of new homes started remaining stagnant at less than 600,000 in annual terms, a third of the normal figure, while second-hand house sales seem to be gradually getting back to normal, in August exceeding 5 million in annual terms.
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The CPI rises to 3.8% and core inflation to 2.0% but this should ease off in the fourth quarter of 2011.
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Inflation continued to surprise by rising but the outlook for 2012 does not include a scenario of inflationary pressures so the Federal Reserve still has some room to manoeuvre. The general consumer price index (CPI) increased in August by 3.8% year-on-year, 3.6% in July, but more significant was the rise in the core CPI, which excludes energy and food prices, up by 2.0% compared with the previous month's figure of 1.8%. The core CPI continues to rise from its record low of 0.6% in October 2010, pushed up by the end of discounts in sectors such as automobiles, by higher oil prices being partly passed on to consumer prices and especially by the increase in house rents. Apart from the latter, which is due to the greater demand for rental family homes because of the crisis, the other components should start to ease in the last quarter of the year, given the low level of production capacity utilization.
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The foreign sector might contribute positively to growth in the third quarter.
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The foreign sector might also provide economic activity with some breathing space. July's trade balance of 44,808 million dollars was 13.1% lower than the figure for the previous month. The improvement was mostly due to the upswing in export volumes after a bad June, which suggests a greater positive contribution to GDP growth.
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Japan
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Japan: the recovery continues, albeit with doubts
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After revising its GDP figures, the economy fell by 0.5% in the second quarter instead of the previously announced 0.4% but this does not alter expectations of a vigorous second half to the year. In 2011 as a whole, the Japanese economy will decline by 0.5%, picking up again in 2012 and advancing by 2.7%. This downward revision must be understood as a return to normality after an initial estimate that had been surprisingly high.
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Japan falls by a minimal 0.5% in the second quarter and is expected to improve in the third.
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On the other hand, a breakdown in GDP shows the downward revision to be more ambiguous, based on a recovery in stocks that is better than had previously been estimated and a certain reticence in capital goods investment due to the uncertainty caused by the power cuts and the growth problems of advanced economies. However, private consumption fell less than expected and exports held firm.
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Japanese exports depend on Asia and should contribute to its recovery in the second half of the year.
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In this respect, the foreign trade figures for July and August were lukewarm, with a slowdown in exports after a good June. But in spite of their current lethargy, exports should contribute positively to growth in the third quarter if we take into account the low starting point of the second quarter, whose 4.9% drop is only matched, most recently, by the figures in 2009. Similarly, the recovery in exports since May has been based mainly on sales to the rest of the Asian continent, amounting to 50%, whose growth still appears robust.
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Industrial production continues its recovery but is slowing up.
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Industrial production is following the example given by exports, with a recovery that has already regained two thirds of what was lost with the earthquake, in spite of August's slowdown. An image that improves if we remember that June's industrial production of consumer goods exceeded the level prior to the catastrophe. Also construction, particularly weak in the second quarter, presented good figures for homes started in July.
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Where doubts become more evident is in investment and confidence indices. Consumers did not improve their expectations in August, remaining at the low level of 37.0 points, close to April's minimum of 33.1 points, while machinery orders, which provide an early indication of investment costs, fell back in July, reflecting the dominant feeling of uncertainty. In the case of prices, August's CPI, which was up 0.2% year-on-year, the same rate as in July, proved that the end of deflation is by no means consolidated. The core CPI, the general index without energy or food, which had not changed from July, dropped by 0.4% year-on-year.
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China
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China continues strong
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China's foreign trade resists the effects of lower world growth.
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The strength of August's export and import data (growing by 24.4% and 30.4%, respectively, above the consensus forecasts) confirms the Chinese economy's resistance to the troubles affecting the West. Looking at its export figures, it's surprising that, some weeks ago, we were concerned about the possible adverse effects of a global double dip recession on China's foreign trade and its rate of growth. For their part, the vigorous growth of imports other than commodities is indicative of a robust domestic demand.
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Similarly, this strong increase in imports, greater than the rise in exports, has helped to reduce China's trade surplus in August, which reached 17,759 million dollars, compared with 31,484 million in July. A reduction that does not occur in its bilateral imbalance with the United States, which continues to widen, with the cumulative figure from January to August now standing at 125.5 billion dollars, 9.5% higher than the figure for the same period in 2010. This bilateral surplus, together with the United States' expansionary monetary policy, is putting increasing pressure on the Chinese authorities to allow the renminbi to appreciate further, which would also help domestic demand to replace growth through exports. Over the last month, the renminbi rose by 0.7% compared with its monthly average of 0.4% last year; an acceleration we believe to be too slight to indicate any real change in the economy's foreign exchange policy.
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Inflation eases slightly to 6.2% and reaffirms the halt in tougher monetary measures.
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Inflation moderated within this robust scenario, standing at 6.2% year-on-year in August after a strong upswing in July to 6.5%. This moderation, although still far from the 4% target set by the government, together with worse growth prospects in the United States and the euro area and to global financial agitation, suggests that China's tough monetary policy will relax, as has occurred in most of the countries in the region. The exception to this hiatus can be found in India which, on 16 September, raised its reference rate again by 25 basis points up to 8.25% (repo rate), given the upswing in inflation in August (of the wholesale price index) to 9.8% from 9.2% in July.
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The slight moderation in several business indicators contrasts with the foreign trade figures.
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Several business indicators in August show a somewhat more contained tone in the foreign sector, within this overall robustness. Retail sales advanced in nominal terms by 17%, slightly below the previous month's figure. The purchasing managers' index (PMI) rose very slightly to 50.9 points, still far from the 53 points of last March. And industrial production grew by 13.5%, compared with 14% in July. For its part, bank credit increased by 16.4%, considerably below the 17.6% monthly average of the first half of the year and the 20% at the end of 2010. However, here it's important to note a base effect that is still very much felt, due to the stimulus policies that encouraged institutions to give credit in 2009.
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In short, while the strength of exports reinforces the foreign sector's predominance, the huge vitality of imports, particularly those other than commodities, suggests that domestic demand might start to gain in importance. Given this duality, it's obviously still too early to talk of changes in the country's growth engines towards domestic consumption and private investment, although this doesn't appear to be a cause for concern in the short term to maintain the Chinese economy's high growth rates. Specifically, the International Monetary Fund, in its biannual World Economic Outlook for September 2011, revises very slightly downwards the forecasts for 2011 and 2012, placing them at 9.5% and 9.0%, respectively, slightly above our own estimates.
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Brazil
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Brazil: growth, industry and corruption in the hot seat
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Brazil's economy grows by 3.1% in the second quarter, notably moderating its rate of progress.
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In line with consensus expectations, Brazil's GDP grew by 3.1% year-on-year in the second quarter of 2011, 0.8% compared with the previous quarter, suggesting a gradual slowdown in the second Latin American economy. A breakdown by component verifies the following: the notable resistance of household consumption, boosted by an unemployment rate at a record low; investment's gradual loss of steam; and the stagnation in foreign demand, although exports withstood the strong real surprisingly well over the period in question. With regard to public expenditure, its growth was similar to that of the first quarter.
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Brazil's central bank surprises by lowering interest rates, although inflation has yet to let up.
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With a view to the second half of the year, macroeconomic indicators and the slowdown in the recovery of advanced economies point to few changes in the pace of activity for Brazil's economy compared with that observed in the last quarter, perhaps improving slightly by the end of the year, when the latest stimulus measures start to have an effect. Given this scenario, we have revised downwards our growth forecast for 2011, from 4.2% to 3.9%, and also for 2012, from 3.8% to 3.6%.
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This palpable tone of moderation in growth prompted Brazil's central bank to lower the SELIC rate by 50 basis points after its meeting in August and not to rule out further decreases before the end of the year. This decision surprised many analysts as inflation has yet to let up and is still moving away from the target set by the Monetary Policy Committee (4.5% ±2). In August, it reached 7.2% and, contrary to expectations, the preliminary figures for September point to greater increases. With a view to the remainder of 2011, base effects should play in its favour but the marked depreciation of the real in the last month, to levels not seen since mid-2010, might compromise the necessary price correction.
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Nonetheless, this appreciation is still good news for the export industry, particularly for manufacturers. A sector that was also thankful for the Brazilian government's recent decision to substantially raise the duty on imports of automobiles with low local content (except for those from Mercosur countries or Mexico), which would particularly affect vehicles from China and Korea.
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Risk aversion achieves what the Brazilian authorities did not: slowing up the real.
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This measure, clearly protectionist in nature, not only goes against the price moderation but might also lead to formal WTO disputes between the Brazilian authorities and those of countries affected by the duty. Should this happen, Dilma Rousseff's government would open up another front line, this time on the international scene, added to the battlefront already set up within its own borders. In the last few months, the Brazilian president has embarked on a tough fight against corruption that has already led to the resignation of four ministers and the exit from the coalition government of the Republic Party, an ally of Lula and Rousseff's Workers' Party since 2003. Although public opinion supports Rousseff's tough approach in combating corruption, the PR's exit from the coalition may hinder the president's ability to keep a firm hand on the Brazilian economy's helm; a firmness that's essential given the uncertain seas at a world level.
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Mexico
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Mexico: protected by domestic expenditure
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Domestic expenditure's good tone is protecting the Mexican economy from the slowdown in growth in the United States.
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A breakdown of GDP components for the second quarter of 2011 reveals a marked upswing in investment, up by 9.4% compared with the same period a year ago; a 4.3% growth in consumption; a 2.6% drop in public consumption; and upward trends in exports and imports of 8.1% and 6.8%, respectively (all these figures being year-on-year growth). Household spending and the good performance by private investment, as well as public, have confirmed their role as the main supports for Mexico's economic growth given a foreign demand that is increasingly hindered by the slowdown in the recovery of the advanced economies and particularly the United States.
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At this juncture, there are few doubts that this slowdown will continue throughout the second half of the year, forcing us to revise downwards our growth forecasts for the Mexican economy to 3.9% in 2011 and 3.5% in 2012 (previously 4.5% and 4%, respectively), in line with the new scenario we're contemplating for the United States.
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The bulk of the evidence available suggests that inflation will end the year within its target range, helping interest rates to fall should economic prospects worsen.
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This scenario of moderation has not gone unnoticed by the Monetary Policy Committee of Banxico which, in its last minutes, left the door open to a possible reduction in interest rates before the end of the year. In this respect, the recent trend in prices has prepared the ground for them: in year-on-year figures, inflation fell to 3.4% in August and the bulk of the evidence suggests that it will end the year close to 3% (within the central bank's target range). Nevertheless, we still do not expect any changes in monetary policy in the remainder of 2011 unless economic activity deteriorates more than expected in our main scenario.
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The situation looks a little more agitated in the fiscal area. In the coming weeks, the parliament will debate the 2012 Budget Project presented by the Federal Government and the commitment to fiscal stability acquired over the last few years will more than likely be maintained. However, we do not expect any changes of a structural nature that reduce the public treasury's dependence on oil or generate the necessary resources to significantly improve the country's infrastructures or educational system. Although there's no doubt that these are necessary and, sooner or later, inevitable, the closeness of the presidential elections, in July 2012, does not facilitate agreement along these lines.
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Oil prices: the role of fundamental factors vs. speculation
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After the Great Recession of 2008 and 2009, when Brent crude plummeted to 40 dollars per barrel, oil prices once again started to rise and now seem to have stabilized over the last few months at around 115 dollars. This sharp rise and crude's strong resistance to a fall in price over the last few months, in spite of the weak recovery in advanced economies, has reopened debate regarding the role played by the fundamental laws of supply and demand compared with the importance of speculation.
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Concerning demand, the growth of emerging markets (with a high income elasticity of demand for energy) lies behind a large part of the rise in crude prices in the first decade of the century, as well as their recovery since 2009. In other words, economic progress is actually the most important factor in determining energy demand. In particular, oil consumption increases with GDP growth, especially if the country's income level is relatively low. In other words, while high-income countries can maintain high growth rates without incurring big rises in their consumption of crude, this is not the case for less developed regions.(1) The dynamism of emerging economies, exceeding most forecasts, has therefore been reflected in a rise in the demand for crude that, given the limitations to an increase in supply, has inevitably led to notably higher prices. By way of example, while global consumption between 2007 and 2010 increased by 0.9 million barrels per day, in China (the great emerging consumer) this rise was 1.5 million (see the graph below). So global consumption not including the Asian giant must have fallen by 600,000 barrels per day, largely possible thanks to rising prices, although it's true that the economic decline in some advanced countries during this period has also helped to reduce their energy demand.
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Looking at supply, the geopolitical instability in North Africa and the Middle East has also been a decisive factor in the higher oil prices during the first half of this year. In particular, the outbreak of the Libyan Revolution in mid-February represented a halt in 2% of the world's production. If we assume a short-term price elasticity of demand for crude of –0.07, which is the maximum value estimation (in absolute terms) given by the IMF's World Economic Outlook from April 2011, then a 2% fall in supply entails a rise in oil prices of a little more than 28%.(2) This increase is similar to the rise of 25% that occurred between February and April this year. In summary, a low price elasticity of demand means that small changes in the present and future supply lead to sharp variations in price.
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(1) Several estimates place the income elasticity of energy demand for high-income economies at around 0.5 and close to 1 for low and middle-income economies.
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(2) A price elasticity of –0.07 suggests that a 10% increase in price leads to a 0.7% fall in demand.
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Lastly, the high and growing relevance of financial investment of a speculative nature in the futures market for crude and its effect on the level and volatility of prices is an issue that generates a wide range of opinions. On the one hand, numerous analysts conclude that the classic laws of supply and demand are the main factors behind the sharp rises and subsequent falls in price during the first decade of the century, arguing that the negligible evidence of stockpiling is proof that speculation has not played a significant role. Specifically, according to these analysts, if speculators bet on a rise in oil prices by acquiring futures, the futures price will rise to a level way above the spot price. In such a situation, there are incentives to buy spot-price oil, store it (thereby increasing stocks) and sell it on the futures market, so that the rise in the spot price in a speculative scenario occurs due to stockpiling.
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However, those analysts that claim that financial investors in commodities have helped to create speculative bubbles also believe that stock variations are not a good indicator of the role played by speculators. They argue that if the futures price goes way above the spot price, the oil-producing countries themselves may decide to postpone extraction to sell oil on the futures market. In this case, the spot price would rise without any accompanying accumulation in stock. On the other hand, if the price elasticity of demand for crude is very low, as seems to be the case, neither stocks nor supply would change drastically due to speculative transactions. Lastly, in the presence of other disruptions that can also affect stocks, such as a small disturbance in supply, variation due to speculation may not be visible.
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Continuing with those who defend the importance of speculative investment, most of these propose models wich assume that financial investors hold a somewhat heterogeneous range of opinions. In other words, and as happens in reality, not all investors believe the economy will develop in the same way, even though they may have the same sources of information. It is precisely because of this plurality that the equilibrium price does not coincide with the price resulting from fundamental factors. The example of a «beauty contest» given in the mid-1930s by John Maynard Keynes to explain stock market prices is useful for understanding how this happens.(3)
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The analogy used by Keynes is that of a contest where the participants must choose the six faces they believe are the most beautiful from a set of photographs. Once they have voted, a prize draw is held from among those individuals who chose the face that received the most votes. Although certainly some players would choose the faces they personally consider to be the most beautiful, other participants would go a little further and try to guess how most people would perceive beauty and would make their choice based on this supposition. Empirically, it has been observed that, when participants do not choose according to their own standards but predict what others might think or even try to predict what others might predict regarding the overall consensus, the winning face obtains a higher percentage of votes. Similarly, within a market scenario of mainly optimistic (pessimistic) speculators, the equilibrium price will be above (below) the price set by the classic factors of supply and demand, as would happen with the percentage of votes for the most beautiful face.(4)
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In short, although the classic macroeconomic factors of supply and demand are two key factors in explaining a large number of the sharp short-term movements observed in the price of crude, the growing importance of commodities as a target for financial investment is something that cannot be ignored.
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(3) For more details, see chapter 12 of «General Theory of Employment, Interest and Money» by John Maynard Keynes.
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(4) For more details, see Allen, F., S. Morris and H.S. Shin (2006), «Beauty Contests and Iterated Expectations in Asset Markets», Review of Financial Studies, v. 19 no. 3.
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This box was prepared by Clàudia Canals
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International Unit, Research Department, "la Caixa"
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Commodities
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Following lower expectations
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Oil falls to 106.60 dollars due to fears of a double dip recession in advanced economies.
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The price of crude remained stable between 22 August and 27 September, down 0.9% which placed it at 106.60 dollars per barrel (Brent quality, for one-month deliveries), 15.1% above its level at the start of the year and 37.3% above last year's level. Although this drop is small, we should note that oil prices had risen up to 20 September by 4.3%.
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This drop in oil prices, and in the rest of commodities, should be seen within the context of less global growth, particularly in the United States and Europe. Political unrest in North Africa and the Middle East, difficulties in supply and also the continuing growth of emerging economies, which are more energy-intensive, have delayed a moderation in prices. Crude is unlikely to fall below 100 dollars per barrel before the end of the year but, at present, the most likely risks would result in a downward trend.
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Metals far further than foods.
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Falls predominate in the rest of commodities, resulting from the downward revision of expectations. The CRB commodities index lost 4.8% between 22 August and 27 September. Base metals, which are closely related to economic growth, fell across the board. Particularly of note were the 12.9% drop in copper and the 9.0% drop in nickel, as well as the abrupt end to the upswing in silver and falls in the rest of the precious metals. The drop in gold is significant, not taking advantage, this time, of the prevailing uncertainty, perhaps suffering from vertigo. This precious metal fell by 12.2%, reaching 1,655 dollars an ounce, when at the beginning of September it had gone above 1,900 dollars intraday. The drops in foods were less unanimous, such as the fall in wheat and sugar prices combined with rises in barley and rice.
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There's still oil... but it will be more expensive
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In the year 2000, Saudi Arabia's former Oil Minister, Sheikh Ahmed Zaki Yamani, announced that «the Stone Age did not come to an end because we had a lack of stones, and the oil age will not come to an end because we have a lack of oil». According to his reasoning, there are sufficiently large reserves of this mineral to allow for an orderly transition towards a more widespread use of new energy sources. At first glance, this theory seems to be supported by the figures for global oil reserves. The discoveries of deposits and new non-conventional techniques for obtaining oil have meant that the potentially available stock has increased over the last ten years, postponing the day it will run out. However, this view could be misleading as the cost of extracting the oil must also be taken into account. Based on current growth patterns, permanently higher oil prices would affect the world's economic development. So the question we should be asking is how long can oil meet global demand at a reasonable price?
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To find an answer to this question, we have to analyze the long-term trends in oil supply and demand. This is not without its difficulties, however. The appearance of new technologies and governments encouraging the use of alternative energy sources to introduce changes in the energy model might influence demand. At the same time, estimates of oil reserves are uncertain as these vary significantly between different sources and, moreover, new deposits might be discovered. Similarly, both series depend on the current and expected price of oil.
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According to the statistics published by the English oil company British Petroleum (BP), the emerging countries led the growth in oil consumption during the first decade of the 21st century with an increase of 43.8%, while consumption in advanced economies fell slightly by 3.5%. As a consequence, the global consumption of oil rose by 14.1% during the first decade of the 21st century, totalling 87 million barrels a day.
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In spite of rising oil consumption at a global level, the pace of growth is showing clear signs of a slowdown compared with the 21.8% rise recorded during the 1990s. This is essentially due to two reasons. Firstly, greater efficiency in the use of oil. This means that, today, the same goods and services can be produced with a lower consumption of the mineral. Secondly, the use of other sources to obtain energy. Although oil is still the planet's main energy resource, in 2010 its consumption accounted for a third of the world's total energy consumption, lower than the figure of 38.1% at the start of the century. Coal and, to a lesser extent, renewable energy sources and gas increased their share over the same period. These two underlying factors will maintain the slowdown in the growth of oil consumption over the coming decades.
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Most reports on long-term oil consumption trends support this scenario. In fact, both BP and the International Energy Agency (IEA) estimate that global oil demand will be around 100 million barrels a day by 2030.(1) This means a 13.9% rise in oil consumption over the next 20 years, much lower than the figure recorded during the preceding two decades, namely 31.4%.
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In line with the statistics published by BP, proven oil reserves (the reserves that can be exploited profitably using existing technology) amounted to 1.4 trillion barrels in 2010. This means that, assuming weak growth in oil consumption as from 2030, today's reserves are enough to meet demand for the next 38 years.
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(1) For further information, see BP Energy Outlook 2030 and IEA: World Energy Outlook 2010.
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It must also be noted that these reserves are not spread uniformly among the oil-producing countries. The above graph simulates the number of countries that will still have reserves over time.(2) As can be seen, the number of countries with significant oil production will gradually fall. According to these calculations, in 18 years the number of countries that will still have oil reserves will have halved, from 30 to 15. Oil production will therefore be concentrated in the hands of very few agents. Moreover, 10 of these 15 countries are members of the Organization of Petroleum Exporting Countries (OPEC), a cartel whose aim is to coordinate oil production policies in order to control its price as far as possible. This will be very simple within just a few years. In 2029, for example, these countries will possess close to 95% of all proven oil reserves. But, at the same time, this high concentration means that, in order to meet the world's demand for oil, these countries will have to multiply their current production capacity by 2.6 in less than 20 years. Undoubtedly a big challenge that requires heavy investment. All this will push up oil prices in the medium term.
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There are two factors that might ostensibly prolong the oil supply. These are: an increase in proven oil reserves and mineral extraction using non-conventional techniques. In the first case, the discovery of new deposits and the reduction in the cost of oil extraction techniques have increased proven reserves almost uninterruptedly. According to estimates by the US Geological Survey (USGS), and given the rate at which deposits have been discovered over the last few years, the planet still holds 0.8 trillion additional barrels of conventional oil. This would place proven reserves at around 2.2 trillion barrels, enough to meet world demand over the next 60 years. At the same time, the IEA estimates that the oil supply might increase by close to 5.8 trillion extra barrels through non-conventional techniques. Of note are oil reserves that are difficult to extract (as they are in deep sea locations or due to the use of techniques to recover oil from current deposits), heavy oil, oil shales and synthetic oil, obtained via coal and gas.
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(2) We have assumed that the countries' production rate will increase at the same pace as consumption. When an oil-producing country runs out of reserves, the rest of the countries share out its production in proportion to their reserves.
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According to these figures, total oil reserves might meet the world's demand for more than a century. During this period, non-conventional oil would become more important, to the detriment of conventional. Production of the latter would steadily fall, once peak oil had been reached.(3) Nevertheless, as can be seen in the above graph, the cost of obtaining oil differs greatly depending on the technique used. In fact, a substantial difference can be seen between the marginal cost of extracting conventional and non-conventional oil, which can be three times as much in some cases. Undoubtedly, once conventional reserves have been exploited, the higher production costs will be passed on entirely to the end product. This gives us a long-term outlook where the price of oil is very likely to go on rising.
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In conclusion, demand forecasts point to conventional oil running out during this century. Although it's true that new non-conventional extraction techniques could increase the supply of this mineral, this would happen at a cost that, today, is still very high. Consequently, and paraphrasing the words of Sheikh Yamani, perhaps the Oil Age will come to an end due to a lack of... cheap oil.
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(3) Peak oil is the time when the maximum level of oil extraction is reached.
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This box was prepared by Joan Daniel Pina
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European Unit, Research Department, "la Caixa"
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