Archive for the ‘Future Scenarios’ Category

ASPO Ireland is kicking off its first event for 2012 by inviting back the two leading economists it brought to Ireland last year, Dr. Michael Kumhof from the research team at the IMF and Professor Steve Keen from the University of Western Sydney. Both Kumhof and Keen are participating in the influential INET conference in Berlin next month and we’ve taken advantage of the opportunity to get them both in Dublin together. The IIEA is kindly hosting the event.

Kumhof and Keen’s work is of interest because of their attempts to model how the economy works, and by so doing, attempting to forecast how the economy might unfold in the future under different sets of scenarios. What’s particularly interesting about the models they’ve built is that they’re based on fundamentally different theories of how the economy is believed to work. Kumhof’s model is based on the economic theory thought to everyone today as ‘economics’ based on the assumption of equilibrium between supply and demand, called general equilibrium theory, and also known as neoclassical economics. In stark contrast, Keen’s starting point is that the economy is rarely if ever in equilibrium, a dis-equilibrium theory.

Kumhof was centrally involved in a piece of research published in the IMF’s World Economic Outlook last April on the impact of peak oil on the global economy: Oil Scarcity, Growth, and Global Imbalances. Included below is a graphic showing the oil supply scenarios considered and another showing the model’s forecast global GDP based on the shock associated with each scenario:

Kumhof gave a very compelling presentation in Dublin last October when he came to present on this work.

Eqaully, Keen, when he presented at the IIEA last November, gave a compelling presentation on how the Global Financial Crisis, or GFC as the Australians like to call it, was no black swan event and was forewarned by a small group of economists outside the mainstream (see Bezemer for an overview of who saw it and why). Keen actually built the foundation for his economic modelling approach back in 1995, and forewarned back then that we were on an unsustainable track. Curiously, around the same time ASPO’s founder, Dr Colin Campbell started his work to warn the world of peak oil. He has since coupled his purely monetary model with a physical stocks-and-flows model to look at carbon emissions and energy consumption in the Asia Pacific region as part of a study for UNEP on resource efficiency (REEO). The scenarios considered and the results emerging are fascinating.

The Irish Context

Macroecocomic modelling along similar lines to that above is carried out in Ireland by the ESRI. There, Prof John Fitzgerald heads up the Energy Research Policy Centre (EPRC). The ESRI macroeconomic model was originally developed out of a model called HERMES, a model built immediately after the Seventies oil shocks, curiously enough, to help economists understand their impacts and develop policy.
In 2010 the ESRI published a study entitled ‘Recovery Scenarios for Ireland: An Update‘ which considers two scenarios for Ireland’s economic future, one called the High Growth scenario and the other called the Low Growth scenario. Disturbingly, the  Low Growth scenario assumes an annual average GDP growth rate over the period 2011-2015 of 3.2% (Table 3.2) and the deficit problem arising from this can be seen in Figure 7, included below:
Clearly, based on recent performance, we’re not on a trajectory to get our deficit under control. Not surprising considering the growing chatter about the need for a second bailout, a la Greece.
Unfortunately, what’s not considered by this model is the output of Kumhof’s research, above. Not that we need sophisticated models like those used at the ESRI or the IMF to tell us what the general impact of a continuing hike in the price of oil might be on the economy. But more importantly, and this is Keen’s contribution, these traditional equilibrium models also ignore the role of debt in the economy. It’s interesting to note that these mainstream models ignore two primary sources of power, the rate of energy consumption (the scientific definition of power), and the rate of credit creation. The power to create and allocate credit is arguably the primary source of economic power, a power very capable of corrupting both itself and our political and social systems, as the documentary Inside Job so deftly demonstrated.
Unfortunately, understanding the ‘general impact’ is not enough, and indeed this is probably where much of the ‘peak oil impact’ narrative has stultified by quickly descending into apocalyptic tales of societal collapse. [As always, when the topic of societal collapse comes up, I direct people to a professional on the topic (Vinay Gupta) for a sense of perspective.] When I met Dr Campbell first back in late 2004, he told me the first sign of peak oil will be a banking crisis. It took me until relatively recently to properly understand what he meant. Given our recent experience in Ireland, we have a very vivid image of what a banking crisis looks like and the damage that gets inflicted on the general public when the banking system over-lends and our politicians fail to stop the bankers dumping to cost of cleaning up the mess in the public lap.
As our banks reign in their lending to repair their balance sheets and purge them of their non-performing loans (at our expense) to get back to a state of ‘prudent banking’, deflating the economy in the process, they’re contemplating returning to a world that existed in the Nineties, before Greenspans’ Irrational Exuberance took hold. Problem is, back in the Nineties, oil was less than $20/barrel. Now with oil prices remaining consistently over $100/barrel, an enormous increase, the floor at which our bankers think they need to get to in order to hit ‘prudent banking’ has dropped considerably. We can now start to understand the transmission system for the impact of high and increasing oil prices. Sadly, it will look like more of what we’ve been seeing since the bubble burst in 2008. Peak oil is a systemic risk to our banking system, much like Anglo was, and with similar implications. At a macro level, higher oil prices lower global economic activity, the reduced aggregate demand leading to job losses. At the micro level, as more  disposable income gets diverted towards the increased price of oil, our ability to put petrol in the car to get to work to earn the money to pay the mortgage is reduced, and that’s for those lucky enough not to have been impacted by the reduced aggregate demand and haven’t lost their job. Increased loan impairments start to impact on bank balance sheets, and well, you know the rest.
If the above analysis is correct, then the focus of peak oilers needs to grow beyond collapse rhetoric and talk about specifics: banking policy. Peak oil should be an issue keeping the governor of our central bank awake at night (not that he has a shortage of such issues at the moment). More positively, it points the way to the lever to pull to help turn the heaving behemoth that is a national economy away from the iceberg of energy security: lending policy. To elaborate, you only get a loan if the net impact of the money spent will be to reduce your overall exposure to future energy price rises/availability.

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The recent ASPO/SEAI event, which was headlined by a presentation from the IMF on Chapter 3 of their April 2011 WEO, has prompted some further thinking on the issue of Ireland’s strategy for risk management and resilience building. Probably the most important statement by Dr. Kumhof was

If there is a non-negligible risk of future oil scarcity in the near term, then it would be negligent not to manage the associated risks.

Dr Kumhof presented a wealth of very useful information, and more importantly, an approach to understanding our economy’s dependence on energy and oil in particular, that needs to be repeated for Ireland. Below are some initial thoughts using headline data from the IMF and SEAI.

The chart above shows total oil consumption in Ireland on energy related activities (95% of all oil used) [source]. Clearly, the lions share goes into Transport, although Residential use is also substantial.

A closer look at the Transport sector demonstrates that private cars are the single largest consumers. Consumption by rail and public passenger services is paltry. ‘Unspecified’ and ‘Fuel Tourism’  are remarkably significant and will be looked into further in future research.

Let us next take a look at historic consumption and future projections, which were prepared by SEAI [source]: (more…)

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Morning Seminar – Oct 10th – National Gallery, Dublin 10am

Assessing the Risks

Energy Security and the Global Economy


Dr. Roger Bentley [slides]

Prof. Robert Ayres [slides]

Dr. Michael Kumhof [slides]

Following up on our June seminar Energy Security and Competitiveness in a Rapidly Changing World, our next seminar expands on the recent warning from the IMF, published in their April 2011 World Economic Outlook, on the risks of oil scarcity to the global economy.

Access to affordable, reliable, and sustainable energy is a matter of national security, particularly so for a state such as Ireland, heavily dependent on increasingly expensive imported fossil fuels. Since the last seminar we have seen the unprecedented release by the International Energy Agency of their strategic oil reserve in an attempt to ease pressure on rising prices, further oil price volatility, and continuing economic stagnation in Europe and the US.

Dr. Michael Kumhof, a Deputy Chief at the International Monetary Fund will present his latest research on energy augmented macroeconomic models which formed the basis of Chapter 3 of the IMF’s April World Economic Outlook, entitled ‘Oil Scarcity, Growth, and Global Imbalances’. This work is a noteworthy departure from classical economic growth modeling methodologies. He will be joined by Dr. Robert Ayres (INSEAD) and Dr. Roger Bentley (UK ERC), whose respective work on the role of energy in economic growth and oil production forecasts, were referenced in the IMF study.

This seminar will highlight how

  • traditional models of economic growth exclude energy as a factor of production
  • present a new model incorporating energy as a factor of production (Ayres)
  • present an overview of a comprehensive study of future oil production forecasts and their attendant risks (Bentley)
  • an updated IMF model for economic growth incorporating oil and considering different future availability scenarios (Kumhof)
  Dr. Michael Kumhof Deputy Chief, Modeling Unit, Research Department, International Monetary Fund Dr. Kumhof prepared the economic model and ran the oil supply scenarios published in Chapter 3 of the IMF’s April 2011 World Economic Outlook.He will present his latest work on the impact of different future oil availability scenarios on economic growth.
  Dr. Robert U. AyresProfessor Emeritus, INSEAD Prof. Ayres is a co-author of The Economic Growth Engine: How Energy and Work Drive Material Prosperity and Crossing the Energy Divide: Moving from Fossil Fuel Dependence to a Clean-Energy Future. He has published ground-breaking research into the role of energy in determining economic growth, raising fundamental questions about our conventional models for economic prosperity.
  Dr. Roger BentleyUniversity of Reading Dr. Bentley is a leading expert in energy and oil production forecasts. He co-authored Global Oil Depletion (2009), a report commissioned by the UK Energy Research Council. He has studied the often controversial debate on oil production forecasts since the oil crises of the 1970’s and attended the IEA’s meeting in 1997 on oil reserves which formed the warning in their 1998 World Energy Outlook, a warning repeated in their 2008 WEO.

ASPO Ireland has teamed up with SEAI, who will host the event.

RSVP by Wednesday 5th October to Jackie O’Dowd events@seai.ie
Attendance is free and we advise you to book early to avoid disappointment

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Watching Barack Obama walk off Airforce One this morning in Dublin airport into a very blustery day, it inspired me to take a look at the Eirgrid website to see what kind of power our wind turbine fleet is generating.


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Unemployment, Commodities, and Capital Flows

The latest International Monetary Fund (IMF) World Economic Outlook (WEO) published last month (April 2011) makes for very interesting reading, Chapter 3 specifically: “Oil Scarcity, Growth, and Global Imbalances”.

Considering the findings of the report, it’s remarkable the relatively little press the report has received, and I can find none in the Irish media. All the more remarkable considering their role in our bail-out.

Chapter 3 considers four future oil production scenarios, one of which being a ‘Peak Oil’ scenario (Scenario 2):

  • Benchmark scenario
  • world oil production increases by only 0.8% versus business as usual (BAU) 1.8%
  • Scenario 1: Greater substitution away from oil
    • assumes a more optimistic long-term elasticity of 0.3, almost five times as high as that used in the benchmark scenario
  • Scenario 2: greater declines in oil production
    • -2% per annum (-3.8% vs. BAU)
    • 4% real increase in extraction costs per year (vs 2% in benchmark scenario)
  • Scenario 3: greater economic role for oil
    • the contribution of oil to output (either directly or as an enabler of technology) amounts to 25 percent in the tradables sector and 20 percent in the nontradables sector (rather than 5 percent and 2 percent).

    Oil production assumptions in the IMF model

    The chart above demonstrates the oil production scenarios used in the model. (more…)

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    ASPO Ireland Director, Richard O’Rourke, remarked during his introduction of Vinay Gupta’s Collapsonomics talk in Dublin last September, that he hoped the government is secretly working on an energy security plan to deal with a crisis situation, should one arise.

    The speech below was given by Energy Minister, Eamon Ryan, at the IIEA yesterday, to mark the signature by Ireland on 3 December, 2010 of a Memorandum of Understanding with nine other European countries (Denmark, Norway, Sweden France, Germany, the Benelux countries and the UK) on the North Seas Grid initiative. In his speech the Minister recalls a similar question posed by a Russian diplomat at a Council of Minister’s meeting last year. The speech is a reflection on 3.5 years as Minister and the triumphs, trials and tribulations of the role. (more…)

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    Professor John Barry tipped us off to this report published by Australia’s national science agency, CSIRO:

    Our Future World: An analysis of global trends, shocks and scenarios

    The report includes an interesting chart [Figure 2. Risks identified, and rated, by the World Economic Forum (Source: WEF, 2009)] of risks identified by WEF with Likelihood plotted against Severity (in US$)…


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