Category Archives: global business forecasts

China Passes US in Terms of Purchasing Power Parity

The International Monetary Fund (IMF) announced recently that Chinese GDP passed that of the United States – in terms of purchasing power parity (PPP).

Business Insider charts the relative sizes of the Chinese and US economies in terms of total global output, where, again, production is measured in terms of purchasing power output.


According to the World Bank,

Purchasing power parity conversion factor is the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as a U.S. dollar would buy in the United States.

In a less serious vein, the Economist magazine maintains the Big Mac Index. This is informative, however, inasmuch as MacDonalds outlets range across the globe.

In July of this year, the Economist lists the US price of a Big Mac hamburger as $4.80.

China is among the cheapest places to buy a Big Mac, as shown in this table from Economist data.


The China Big Mac Index, therefore, is 0.57, suggesting Chinese yuan purchase almost twice the actual goods and services in China, as their dollar exchange rate would suggest.

Or to do this calculation based on the current exchange rate, 1 US dollar buys 6.41 Chinese 1 yuan.

So, if the local price has not changed, 16.9 yuan buy a Big Mac, indicating that a Big Mac now has a dollar price of $2.63. Then, if today’s Big Mac still costs $4.80, the renmimbi buys 4.8/2.63 or 1.83 times as much as its market exchange rate indicates. Hence, according to a Big Mac type index evaluation, the renmimbi is undervalued.

This is a pretty good calculation, according to the World Bank, which lists the conversion factor as 0.7.

Of course, there are four to five times as many residents of the People’s Republic of China, as there are US residents. Per capita Chinese incomes, accordingly, are four to five times lower, even in terms of purchasing power parity.

And in terms of market exchange values, the IMF estimates 2014 Chinese GDP at 10,355 billion dollars, compared with $17,416 billion for the US.

The rise of Chinese production has been truly spectacular, as this chart of Chinese GDP shows, based on official Chinese statistics.


There are a lot of other remarkable charts that can be pulled together about China, and I am planning several future posts along these lines.

See you this coming week!

Chinese official courtesy of Wikipedia

Followup on OPEC and the Price of Oil

Well, readers here may have noticed, Business Forecast Blog correctly predicted the OPEC decision about reducing oil production at their Thanksgiving Thursday (November 27) meeting in Vienna.

USA Today reports,

VIENNA — Crude prices plunged Thursday after the powerful Organization of Petroleum Exporting Countries said it wouldn’t cut production levels to stem the collapse in oil prices that have fallen 40% since June.

Saudi Arabia’s oil minister Ali Al-Naimi delivered the news as he left a nearly five-hour meeting of the cartel’s 12 oil ministers here.

Our post was called The Limits of OPEC and was studded with passages of deep foresight, such as

I’m kind of a contrarian here. I think the sound and fury about this Vienna meeting on Thanksgiving may signify very little in terms of oil prices – unless global (and especially Chinese) economic growth picks up. As the dominant OPEC producer, Saudi Arabia may have market power, but, otherwise, there is little evidence OPEC functions as a cartel. It’s hard to see, also, that the Saudi’s would unilaterally reduce their output only to see higher oil prices support US frackers continuing to increase their production levels at current rates.

The immediate response to the much-anticipated OPEC meeting was a plunge in the spot price of West Texas Intermediate (WTI) to below $70 a barrel.


Brent, the other pricing standard, fared a little better, but dropped significantly,


Both charts are courtesy of the Financial Times of London.

The Reuters article on the OPEC decision – Saudis block OPEC output cut, sending oil price plunging – is full of talk that letting prices drift lower, perhaps down to $60-65 a barrel, is motivated by a desire to wing higher-cost US producers, and also, maybe, to squeeze Russia and Iran – other players who are out of favor with Saudi Arabia and other Gulf oil states.

Forecasting Issues and Techniques

Advice – get the data, get the facts. Survey Bloomberg and other media by relevant news story and topic, but whenever possible, go to the source.

For example, lower oil prices may mean Saudi Arabia and some other Gulf oil states have to rely more on accumulated foreign exchange to pay their bills, since their lavish life-styles probably adjusted to higher prices (even though raw production costs may be as low as $25 a barrel). Just how big are these currency reserves, and can we watch them being drawn down? There is another OPEC meeting apparently scheduled for June 2015

Lead picture of Saudi Oil Minister from Yahoo.

The Limits of OPEC

There’s rampant speculation and zero consensus about the direction OPEC will take in their upcoming Vienna meeting, November 27.

Last Friday, for example. Bloomberg reported,

The 20 analysts surveyed this week by Bloomberg are perfectly divided, with half forecasting the Organization of Petroleum Exporting Countries will cut supply on Nov. 27 in Vienna to stem a plunge in prices while the other half expect no change. In the seven years since the surveys began, it’s the first time participants were evenly split. The only episode that created a similar debate was the OPEC meeting in late 2007, when crude was soaring to a record.

Many discussions pose the strategic choice as one between –

(a) cutting production to maintain prices, but at the cost of losing market share to the ascendant US producers, and

(b) sustaining current production levels, thus impacting higher-cost US producers (if the low prices last long enough), but risking even lower oil prices – through speculation and producers breaking ranks and trying to grab what they can.

Lybia, Ecuador, and Venezuela are pushing for cuts in production. Saudi Arabia is not tipping its hand, but is seen by many as on the fence about reducing production.

I’m kind of a contrarian here. I think the sound and fury about this Vienna meeting on Thanksgiving may signify very little in terms of oil prices – unless global (and especially Chinese) economic growth picks up. As the dominant OPEC producer, Saudi Arabia may have market power, but, otherwise, there is little evidence OPEC functions as a cartel. It’s hard to see, also, that the Saudi’s would unilaterally reduce their output only to see higher oil prices support US frackers continuing to increase their production levels at current rates.

OPEC Members, Production, and Oil Prices

The Organization of Petroleum Exporting Countries (OPEC) has twelve members, whose production over recent years is documented in the following table.


According to the OPEC Annual Report, global oil supply in 2013 ran about 90.2 mb/d, while, as the above table indicates, OPEC production was 30.2 mb/d. So OPEC provided 33.4 percent of global oil supplies in 2013 with Saudi Arabia being the largest producer – overwhelmingly.

Oil prices, of course, have spiraled down toward $75 a barrel since last summer.


Is OPEC an Effective Cartel?

There is a growing literature questioning whether OPEC is an effective cartel.

This includes the recent OPEC: Market failure or power failure? which argues OPEC is not a working cartel and that Saudi Arabia’s ideal long term policy involves moderate prices guaranteed to assure continuing markets for their vast reserves.

Other recent studies include Does OPEC still exist as a cartel? An empirical investigation which deploys time series tests for cointegration and Granger causality, finding that OPEC is generally a price taker, although cartel-like features may adhere to a subgroup of its members.

The research I especially like, however, is by Jeff Colgan, a political scientist – The Emperor Has No Clothes: The Limits of OPEC in the Global Oil Market.

Colgan poses four tests of whether OPEC functions as a cartel -.

new members of the cartel have a decreasing or decelerating production rate (test #1); members should generally produce quantities at or below their assigned quota (test #2); changes in quotas should lead to changes in production, creating a correlation (test #3); and members of the cartel should generally produce lower quantities (i.e., deplete their oil at a lower rate) on average than non-members of the cartel (test #4)

Each of these tests fail, putting, as he writes, the burden of proof on those who would claim that OPEC is a cartel.

Here’s Colgan’s statistical analysis of cheating on the quotas.


On average, he calculates that the nine principal members of OPEC produced 10 percent more oil than their quotas allowed – which is equivalent to 1.8 million barrels per day, on average, which is more than the total daily output of Libya in 2009.

Finally, there is the extremely wonkish evidence from academic studies of oil and gas markets more generally.

There are, for example, several long term studies of cointegration of oil and gas markets. These studies rely on tests for unit roots which, as I have observed, have low statistical power. Nevertheless, the popularity of this hypothesis seems to be consistent with very little specific influence of OPEC on oil production and prices in recent decades. The 1970’s may well be an exception, it should be noted.

We will see in coming weeks. Or maybe not, since it still will be necessary to sort out influences such as quickening of the pace of economic growth in China with recent moves by the Chinese central bank to reduce interest rates and keep the bubble going.

If I were betting on this, however, I would opt for a continuation of oil prices below $100 a barrel, and probably below $90 a barrel for some time to come. Possibly even staying around $70 a barrel.

Investment and Other Bank Macro Forecasts and Outlooks – 2

Today, I take a brief look at economic forecasts available from Morgan Stanley, Wells Fargo, and the French concern Credit Agricole. As readers will note, Morgan Stanley has a lively discussion of the implications of the US midterms, while Wells Fargo has a very comprehensive and easy-to-access series of economic projections, ranging from weekly, to monthly and annual. Credit Agricole (apologies for omitting the accent mark) is the first European bank profiled in these brief looks, and has quarterly updates of fairly comprehensive economic projections across a range of variables.

And I might mention that these publications, which date back into September in many cases, are interesting to review both because of their projections and because of what they miss – notably the drop in oil prices and aggressive new round of quantitative easing by the Bank of Japan.

The fact these developments are missed in these September and even later releases qualifies them as genuine surprises. Thus, their impacts are not discounted in past market developments, and, going forward, oil prices and Japan QE could exert significant, discrete effects on markets.

Morgan Stanley

According to the Federal Reserve’s National Information Center, Morgan Stanley is the nation’s 6th largest bank.


The Global Investment Committee (GOC) Weekly for November 10 is notable for some straight talk on the Implications of the US midterms, which Morgan Stanley see as slightly pro-growth, positive for equities, with constructive compromises, characteristic of lame duck presidencies. I quote fairly extensively, because the frankness of the insights and suggestions is refreshing.

The maxim that gridlock in Washington is good for markets has certainly held true during the “do nothing” Congress of the past two years. Now, with the Republicans winning control of the Senate and adding 15 seats to their House majority, the outlook appears to be for more of the same. Happily for investors, an analysis going back to 1900 shows that equity markets have averaged annualized 15% returns when the Congress is controlled by Republicans and the White House by a Democrat.

Although many pundits have suggested that the GOP sweep creates a mandate, the Global Investment Committee (GIC) sees the results as a mandate for change in the functioning and compromise in Washington rather than the embrace of a specific agenda. On that score, unlike the deeply partisan divide between the House and the Senate of the last four years that prevented any compromise bills from getting off the Hill, legislation may actually get to the president’s desk. While President Obama will be free to veto, he is now playing for his legacy and may be apt to compromise on some issues.

The Republicans’ challenge is to demonstrate leadership and competence in governing, a task that will require corralling the Tea Party caucus and, as Morgan Stanley & Co. Chief US Economist Vincent Reinhart wrote last week, “sequencing priorities” in a constructive way. Lacking a coherent issue-driven platform, most Republicans simply ran against Obama. Party infighting or an immediate battle about the debt ceiling and budget authorizations would likely be disastrous for the GOP—and the markets. From the GIC’s perspective, a better result would be for Congress to focus on job-creating initiatives and not on eviscerating the Affordable Care Act (ACA).

Agreement should be easiest around initiatives involving the energy sector, where this year’s 25% decline in oil prices has been front and center. American energy independence is no longer a dream but a real prospect with profound geopolitical as well as economic consequences (see Chart of the Week, page 3). Heretofore, the Keystone XL pipeline, a six-year-old proposal to connect Canadian oil with US Gulf Coast refineries, has been stalled amid wrangling with environmentalists. We believe the pipeline is now likely to win approval, creating a large national infrastructure project. Similarly, the growth of US energy supply is likely to reignite a debate on oil exports, which have been banned since the Arab oil embargoes of the 1970s. With US dollar strength likely to crimp other exports, expanding energy exports is a way to maintain economic growth. There is likely to be similar debate about exports of liquefied natural gas as the US is the world’s largest and lowest-cost producer. We believe that energy exports would be a major beneficiary focus if the new Congress approves the Trans-Pacific Partnership, a free trade agreement that would give the president authority to negotiate deals with 11 Asian nations.

Beyond energy, we expect repeal of the medical-device tax; expansion of defense spending, which has been curtailed under sequestration; and a debate on corporate tax reform, especially given the noise around tax-driven international mergers. Revisions to the ACA, to the extent they are pursued, will likely focus on measures that impact the number of insured and thus, hospitals and managed-care companies. The employer mandate, which requires employers with more than 100 workers to make available health insurance for any employee working more than 30 hours per week, is most likely to be revised, in our view.

As a final note, a review of state and local ballot initiatives suggest that voters are far from embracing an ideological position on fiscal austerity. Minimum-wage increases were passed in each state where they were on the ballot as did several large new-money infrastructure projects in New York and California—a development that MS & Co. Municipals Strategist, Michael Zezas, notes will likely increase bond supplies in 2015.

It looks like the august Global Economic Forum is being being published more infrequently than in the past, the last edition being March 5 of this year.

Wells Fargo

Wells Fargo, accounting to Wikipedia is –

an American multinational banking and financial services holding company which is headquartered in San Francisco, California, with “hubquarters” throughout the country… It is the fourth largest bank in the U.S. by assets and the largest bank by market capitalization…Wells Fargo is the second largest bank in deposits, home mortgage servicing, and debit cards. In 2011, Wells Fargo was the 23rd largest company in the United States.

The Wells Fargo website has a suite of forecasting reports, ranging from weekly, to monthly, to the big annual report, all downloadable in PDF format.

In October, the bank also released this video interview about their economic outlook.

In case you did not get time to watch that, one of the key graphics is the PCE deflator, which has been trending down recently, raising the spectre of deflation in the minds of some.


Credit Agricole

Credit Agricole is an international full services banking company, headquartered in France, with historical ties to French farming,

Their website offers at least two quarterly macroeconomic forecasting publications.

The publication Economic and Financial Forecasts presents a series of tabular forecasts for interest rates, exchange rates and commodity prices, together with the Crédit Agricole Group’s central economic projections. This is a kind of “just the numbers ma’am report.”

Macro Prospects is more discursive and with short highlights on key countries, such as, in the September issue, Brazil and China.

I signed up for emails from Credit Agricole, announcing updates of these documents.

Investment and Other Bank Macro Forecasts and Outlooks – 1

In yesterday’s post, I detailed the IMF World Economic Outlook revision for October 2014, recent OECD macroeconomic projections,  and latest from the Survey of Professional Forecasters.

All these are publically available, quite comprehensive forecasts, sort of standards in the field.

But there also are a range of private forecasts, and I want to focus on investment and other bank forecasts for the next few posts – touching on Goldman Sachs and JP Morgan today.

Goldman Sachs

Goldman Sachs – video presentations on global economic outlook with additional videos for the US, Europe, and major global regions. December 2013

Goldman Sachs, Economic Outlook for the United States, June 2014, Jan Hatzius

Goldman Sachs Asset Management, FISG Quarterly Outlook Q4 2014, (click on the right of the page for Full Document). This is the most up-to-date forecast/commentary I am able to find, and has a couple of relevant points.

One concerns the policy divergence at the central bank level. This is even more true now than when the report was released (probably in October), since the Bank of Japan is plunging into new, aggressive quantitative easing (QE), while the US Fed has ended its QE program, for the time being at least.

The other point concerns the European economy.

Among our economic forecasts, our negative outlook on the Eurozone represents the biggest departure from consensus. We believe policymakers will struggle to correct the trend of poor growth and disinflation. Optimism about the peripheries has faded, and the Eurozone’s powerhouse economy, Germany, has slowed amid weak global demand. Once again the Eurozone’s political divisions and fiscal constraints leave the ECB as the only authority able to respond unilaterally to the threat of a sharper downturn, though hopes of fiscal action are mounting.

Some signs of a sustainable Eurozone recovery have not held up to closer inspection. The peripheries have made substantial progress on austerity and structural reforms, but efforts appear to have stalled, and Spain has probably reaped the most it can from its adjustment for now. Italy’s policy paralysis and relapse into recession is disappointing given this year’s changing of the political guard, which saw Silvio Berlusconi’s exit and Prime Minister Matteo Renzi’s election on a heavily reformist platform. Renzi has shifted gears from political reform to labor reform, which could get under way in early 2015. But Italy’s high debt stock makes it particularly vulnerable to a market backlash, and we are watching for signs of investor pullback that could drive sovereign yields higher.

JP Morgan

JP Morgan has a 2014 Economic Outlook in a special issue of their Thought magazine. This is definitely dated, but there is a weekly Economic Update in a kind of scorecard format (up/down/nochange) from their Asset Management Group.

I’ve got to say, however, that one of the most exciting publications along these lines is their quarterly Guide to the Markets from JP Morgan Asset Management. Here are highlights from an interactive version of the 4Q Guide.

First, the scope of coverage is impressive, although, note this is more of an update of conditions, than a forecast. The reader supplies the forecasts, however, from these engaging slides.


But this slide does not need to produce a forecast to make its point – which is maybe we are not in a stock market bubble but at the start of a long upward climb in the market. Optimism forever!

StockMarketSince 1900

There are plenty of slides that have moral to the story, such as this one on education and employment.


Then, this graphic on China is extremely revealing, and suggests a forward perspective.


I’m finding this excursion into bank forecasts productive and plan coming posts along these lines. I’d rather use the blog as a scratch-pad to share insights as I go along, than produce one humungous summary. So stay tuned.

Top photo courtesy of the University of Richmond

Global and US Economic Outlook – November 2014

There are a number of free, publically available macroeconomic forecast resources which have standing and a long track record.

Also, investment and other banks make partial releases of their macro projections.

IMF World Economic Outlook

The International Monetary Fund (IMF) revises its World Economic Outlook (WEO) toward the end of each year, this year in October with Legacies, Clouds, Uncertainties.

One advantage is comprehensive coverage. So there are WEO projections over 1, 2 and 3 year horizons for more than 100 countries, even obscure island principalities, and for dozens of variables, including GDP variously measured, inflation, imports and exports, unemployment rate, and population.

Here are highlights of the October revision (click to enlarge).


Largely due to weaker-than-expected global activity in the first half of 2014, the growth forecast for the world economy has been revised downward to 3.3 percent for this year, 0.4 percentage point lower than in the April 2014 World Economic Outlook (WEO). The global growth projection for 2015 was lowered to 3.8 percent.

The global recovery continues to be uneven, with some countries and areas struggling, while others move forward into growth.

Downside risks are increasing and include –

SHORT TERM: worsening geopolitical tensions (Ukraine, Syria) and reversal of recent risk spread and volatility compression in financial markets

MEDIUM TERM: stagnation and low potential growth in advanced economies (Eurozone flirting with deflation) and a decline in potential growth in emerging markets

Organization of Economic Cooperation and Development (OECD) Projections

The OECD Economic Outlook Advance Release for the G-20 from October 2014 projects the following growth rates for 2014 and 2015 (click to enlarge).


For total global GDP growth, the OECD projects 3.3 percent for 2014 and 3.7 percent for 2015 or 0.1 percent less for 2015 than the IMF.

Chinese economic growth is ratcheting down from double-digit levels several years ago, to around 7 percent, while Indian GDP growth is projected to stay in the 6 percent range.

There are significant differences in the IMF and OECD forecasts for the United States.

Survey of Professional Forecasters

The Survey of Professional Forecasters (SPF) is another publically available set of macroeconomic forecasts, but focusing on the US economy. The SPF is maintained by the Philadelphia Federal Reserve Bank, which polls participating analysts quarterly, compiling consensus results, spreads, and distributions.

The latest SPF Survey was released August 2014, and is somewhat more optimistic about US economic growth than the IMF and OECD projections.


Investment Bank Data and Projections

Wells Fargo Securities Economics Group produces a monthly report with detailed quarterly forecasts for the US economy. Here is a sample from August 2014 (click to enlarge).


I’m compiling a list of these products and their availability.

The bottom line is there are plenty of forecasts to average together to gin up high likelihood numbers to plug into sales and other business forecast models.

At the same time, there is a problem with calling turning points in almost all these products.

This is not a problem on YouTube now, though. If you search “economic forecasts 2015” on YouTube today, you will see a lengthly list of predictions of economic collapse and market catastrophe by the likes of Jim Rogers, Gerald Calente, and others who dabble in this genre.

We need something like the canary in the coal mine.

The End of Quantitative Easing, the Expansion of QE

The US Federal Reserve Bank declared an end to its quantitative easing (QE) program at the end of October.

QE involves direct Fed intervention into buying longer term bonds with an eye to exercising leverage on long term interest rates and, thus, encouraging investment. Readers wanting more detail on how QE is implemented – check Ed Dolan’s slide show Quantitative Easing and the Fed 2008-2014: A Tutorial

The New York Times article on the Fed actions – Quantitative Easing Is Ending. Here’s What It Did, in Charts – had at least two charts that are must-see’s.

First, the ballooning of the Federal Reserve Balance sheet from less than $1 trillion to $4.5 trillion today –


Secondly, according to Times estimates, about 40 percent of Fed assets are comprised of mortgage-backed securities now – making the Fed a potential major player in the US housing markets.


Several recent articles offer interpretation – what does the end of this five-year long program mean for the US economy and for investors. What were the impacts of QE?

I thought Jeff Miller’s “Old Prof” compendium was especially good – Weighing the Week Ahead: What the End of QE Means for the Individual Investor. If you click this link and find a post more recent than November 1, scroll down for the QE discussion. Basically, Miller thinks the impact on investors will be minimal.

This is also true in the Business Week article The Hawaiian Tropic Effect: Why the Fed’s Quantitative Easing Isn’t Over

But quantitative easing is the gift that keeps on giving. Even after the purchases end, its effects will persist. How could that be? The Fed will still own all those bonds it bought, and according to the agency itself, it’s the level of its holdings that affects the bond market, not the rate of addition to those holdings. Having reduced the supply of bonds available on the market, the Fed has raised their price. Yields (i.e. market interest rates) go down when prices go up. So the effect of quantitative easing is to lower interest rates for things Americans actually care about, such as 30-year fixed-rate mortgages.

Some other articles which attempt to tease out exactly what impacts QE did have on the economy –

Evaluation of quantitative easing QE had “some effects” but it’s one of several influences on the bond market and long term interest rates.

Quantitative easing: giving cash to the public would have been more effective

QE has also had unforeseen side-effects. The policy involved allowing banks and other financial institutions to exchange bonds for cash, and the hope was that this would lead to improved flows of credit to firms looking to expand. In reality, it encouraged financial speculation in property, shares and commodities. The bankers and the hedge fund owners did well out of QE, but the side-effect of footloose money searching the globe for high yields was higher food and fuel prices. High inflation and minimal wage growth led to falling real incomes and a slower recovery.

What Quantitative Easing Did Not Do: Three Revealing Charts – good discussion organized around the following three points –

  1. QE did not work according to the textbook model
  2. QE did not cause inflation
  3. QE was not powerful enough to overcome fiscal restraint

Expansion of QE

But quantitative easing as a central bank policy is by no means a dead letter.

In fact, at the very moment the US Federal Reserve announced the end of its five-year long program of bond-buying, the Bank of Japan (BOPJ) announced a significant expansion of its QE, as noted in this article from Forbes.

Last week, as the Federal Reserve officially announced the end of its long-term asset purchase program (commonly known as QE3), the Bank of Japan significantly ratcheted up its own quantitative easing program, in a surprising 5-4 split decision. Starting next year, the Bank of Japan will increase its balance sheet by 15 percent of GDP per annum and will extend the average duration of its bond purchases from 7 years to 10 years. The big move by Japan’s central bank comes amid the country’s GDP declining by 7.1% in the second quarter of 2014 (on an annualized basis) from the previous quarter following the increase of the VAT sales tax from 5% to 8% in Japan earlier this year and worries that Japan could fall into another deflationary spiral..

The scale of the Japanese effort is truly staggering, as this chart from the Forbes article illustrates.


The Economist article on this development Every man for himself tries to work out the implications of the Japanese action on the value of the yen, Japanese inflation/deflation, the Japanese international trade position, impact on competitors (China), and impacts on the US dollar.

What about Europe? Well, Bloomberg offers this primer – Europe’s QE Quandary. Short take – there are 18 nations which have to agree and move together, Germany’s support being decisive. But deflation appears to be spreading in Europe, so many expect something to be done along QE lines.

If you are forecasting for businesses, government agencies, or investors, these developments by central banks around the world are critically important. Their effects may be subtle and largely in unintended consequences, but the scale of operations means you simply have to keep track.

Oil and Gas Prices – a “Golden Swan”?

Crude oil prices plummeted last week, moving toward $80/Bbl for West Texas Intermediate (WTI) – the spot pricing standard commodity.


OPEC – the Organization of Petroleum Exporting Counties – is a key to trajectory of oil prices, accounting for about 40 percent of global oil output.

Media reports that the Saudi Arabian Kingdom, which is the largest producer in OPEC, is advising that it will not cut oil production at the current time. The US Energy Information Agency (EIA) has a graph on its website underlining the importance of Saudi production to global oil prices.


Officially, there is very little in the media to pin down the current Saudi policy, although, off-the-record, Saudi representatives apparently have indicated they could allow crude prices to drift between $80 and $90 a barrel for a couple of years. This could impact higher cost producers, such as Iran and burgeoning North American shale oil production.

At the same time, several OPEC members, such as Venezuela and Libya, have called for cuts in output to manage crude prices going forward. And a field jointly maintained by Saudi Arabia and Kuwait just has been shut down, ostensibly for environmental upgrades.

OPEC’s upcoming November 27 meeting in Vienna, Austria should be momentous.

US Oil Production

Currently, US oil production is running at 8.7 million barrels a day, a million barrels a day higher than in a comparable period of 2013, and the highest level since 1986.

The question of the hour is whether US production can continue to increase with significantly lower oil prices.

Many analysts echo the New York Times, which recently compared throttling back US petroleum activity to slowing a freight train.

Most companies make their investment decisions well in advance and need months to slow exploration because of contracts with service companies. And if they do decide to cut back some drilling, they will pick the least prospective fields first as they continue developing the richest prospects.

At the same time, the most recent data suggest US rig activity is starting to slip.

Economic Drivers

It’s all too easy to engage in arm-waving, when discussing energy supplies and prices and their relationship to the global economy.

Of course, we have supply and demand, as one basis. Supplies have been increasing, in part because of new technologies in US production and Libyan production coming back on line.

Demands have not been increasing, on the other hand, as rapidly as in the past. This reflects slowing growth in China and continuing energy conservation.

One imponderable is the influence of speculators on oil prices. Was there a “bubble” before 2009, for example, and could speculators drive oil prices significantly lower in coming months?

Another factor that is hard to assess is whether 2015 will see a recession in major parts of the global economy.

The US Federal Reserve has been planning on eliminating Quantitative Easing (QE) – its program of long-term bond purchases – and increasing the federal funds rate from its present level of virtually zero. Many believe that these actions will materially slow US and global economic growth. Coupled with the current deflationary environment in Europe, there have been increasing signs that factors could converge to trigger a recession sometime in 2015.

However, low energy prices usually are not part of the prelude for a recession, although they can develop after the recession takes hold.

Instead, prices at the pump in the US could fall below $3.00 a gallon, providing several hundred dollars extra in discretionary income over the course of a year. This, just prior to the Christmas shopping season.

So – if US oil production continues to increase and prices at the pump fall below $3.00, there will be jobs and cheap gas, a combination likely to forstall a downturn, at least in the US for the time being.

Top image courtesy of GameDocs

Links, end of September

Information Technology (IT)

This is how the “Shell Shock” bug imperils the whole internet

It’s a hacker’s wet dream: a software bug discovered in the practically ubiquitous computer program known as “Bash” makes hundreds of millions of computers susceptible to hijacking. The impact of this bug is likely to be higher than that of the Heartbleed bug, which was exposed in April. The National Vulnerability Database, a US government system which tracks information security flaws, gave the bug the maximum score for “Impact” and “Exploitability,” and rated it as simple to exploit.

The bug, which has been labeled “Shell Shock” by security experts, affects computers running Unix-based operating systems like Mac OS X and Linux. That means most of the internet: according to a September survey conducted by Netcraft, a British internet services company, just 13% of the busiest one million websites use Microsoft web servers. Almost everyone else likely serves their website via a Unix operating system that probably uses Bash.

Microsoft’s Bing Predicts correctly forecasted the Scottish Independence Referendum vote

Bing Predicts was beta tested in the UK for this referendum. The prediction engine uses machine-learning models to analyse and detect patterns from a range of big data sources such as the web and social activity in order to make accurate predictions about the outcome of events.

Bing got the yes/no vote right, but missed the size of the vote to stay united with England, Wales, and Northern Ireland.

Is the profession of science broken (a possible cause of the great stagnation)? Fascinating discussion which mirrors many friends’ comments that too much time is taken up applying for and administering grants, and not enough time is left for the actual research, for unconventional ideas.

What has changed is the bureaucratic culture. The increasing interpenetration of government, university, and private firms has led everyone to adopt the language, sensibilities, and organizational forms that originated in the corporate world. Although this might have helped in creating marketable products, since that is what corporate bureaucracies are designed to do, in terms of fostering original research, the results have been catastrophic.


Climate Science Is Not Settled The Wall Street Journal piece by a former Obama adviser and BP scientist inflamed the commentariat, after publication September 16, on the eve of the big climate talks and march in New York City. See On eve of climate march, Wall Street Journal publishes call to wait and do nothing for a critical perspective.

This chart, from NOAA, is one key – showing the divergence in heat stored in various layers of the oceans –


Nicholas Stern: The state of the climate — and what we might do about it TED talk.


The public response to the Ebola epidemic is ramping up, but the situation is still dire and total cases and deaths are still increasing exponentially.

Ebola outbreak: Death toll passes 3,000 as WHO warns numbers are ‘vastly underestimated’

“The Ebola epidemic ravaging parts of West Africa is the most severe acute public health emergency seen in modern times.Never before in recorded history has a biosafety level four pathogen infected so many people so quickly, over such a broad geographical area, for so long.”


Global Economy

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Recession and Economic Projections

I’ve been studying the April 2014 World Economic Outlook (WEO) of the International Monetary Fund (IMF) with an eye to its longer term projections of GDP.

Downloading the WEO database and summing the historic and projected GDP’s suggests this chart.


The WEO forecasts go to 2019, almost to our first benchmark date of 2020. Global production is projected to increase from around $76.7 trillion in current US dollar equivalents to just above $100 trillion. An update in July marked the estimated 2014 GDP growth down from 3.7 to 3.4 percent, leaving the 2015 growth estimate at a robust 4 percent.

The WEO database is interesting, because it’s country detail allows development of charts, such as this.


So, based on this country detail on GDP and projections thereof, the BRIC’s (Brazil, Russia, India, and China) will surpass US output, measured in current dollar equivalents, in a couple of years.

In purchasing power parity (PPP) terms, China is currently or will soon pass the US GDP, incidentally. Thus, according to the Big Mac index, a hamburger is 41 percent undervalued in China, compared to the US. So boosting Chinese production 41 percent puts its value greater than US output. However, the global totals would change if you take this approach, and it’s not clear the Chinese proportion would outrank the US yet.

The Impacts of Recession

The method of caging together GDP forecasts to the year 2030, the second benchmark we want to consider in this series of posts, might be based on some type of average GDP growth rate.

However, there is a fundamental issue with this, one I think which may play significantly into the actual numbers we will see in coming years.

Notice, for example, the major “wobble” in the global GDP curve historically around 2008-2009. The Great Recession, in fact, was globally synchronized, although it only caused a slight inflection in Chinese and BRIC growth. Europe and Japan, however, took a major hit, bringing global totals down for those years.

Looking at 2015-2020 and, certainly, 2015-2030, it would be nothing short of miraculous if there were not another globally synchronized recession. Currently, for example, as noted in an earlier post here, the Eurozone, including Germany, moved into zero to negative growth last quarter, and there has been a huge drop in Japanese production. Also, Chinese economic growth is ratcheting down from it atmospheric levels of recent years, facing a massive real estate bubble and debt overhang.

But how to include a potential future recession in economic projections?

One guide might be to look at how past projections have related to these types of events. Here, for example, is a comparison of the 2008 and 2014 US GDP projections in the WEO’s.


So, according to the IMF, the Great Recession resulted in a continuing loss of US production through until the present.

This corresponds with the concept that, indeed, the GDP time series is, to a large extent, a random walk with drift, as Nelson and Plosser suggested decades ago (triggering a huge controversy over unit roots).

And this chart highlights a meaning for potential GDP. Thus, the capability to produce things did not somehow mysteriously vanish in 2008-2009. Rather, there was no point in throwing up new housing developments in a market that was already massively saturated, Not only that, but the financial sector was unable to perform its usual duties because it was insolvent – holding billions of dollars of apparently worthless collateralized mortgage securities and other financial innovations.

There is a view, however, that over a long period of time some type of mean reversion crops up.

This is exemplified in the 2014 Congressional Budget Office (CBO) projections, as shown in this chart from the underlying detail.


This convergence on potential GDP, which somehow is shown in the diagram with a weaker growth rate just after 2008, is based on the following forecasts of underlying drivers, incidentally.


So again, despite the choppy historical detail for US real GDP growth in the chart on the upper left, the forecast adopted by the CBO blithely assumes no recession through 2024 as well as increase in US interest rates back to historic levels by 2019.

I think this clearly suggests the Congressional Budget Office is somewhere in la-la land.

But the underlying question still remains.

How would one incorporate the impacts of an event – a recession – which is probably almost a certainty by the end of these forecast horizons, but whose timing is uncertain?

Of course, there are always scenarios, and I think, particularly for budget discussions, it would be good to display one or two of these.

I’m interested in reader suggestions on this.