Tag Archives: IMF

The IMF, Fossil Fuels and the Name for a Rose


Tis but thy name that is my enemy;
Thou art thyself, though not a Montague.
What’s Montague? it is nor hand, nor foot,
Nor arm, nor face, nor any other part
Belonging to a man. O, be some other name!
What’s in a name? that which we call a rose
By any other name would smell as sweet


But if thine enemy is the fossil fuel industry,
And one would name a rose as ‘tax’,
then television, and radio, and newspapers
and twitter and a multitude of social media
would declare such rose as smelling most foul,
like vomit, or excrement or the pustulent sores
of a pox-ridden hag in the lowliest of taverns

In truth, Juliet was wrong. Names do matter. They frame narratives, just as the names Montague and Capulet did.

We live in a neoliberal world where both ‘tax’ and ‘subsidy’ are framed as evil. So whatever you do don’t talk about introducing a carbon ‘tax’, talk about eliminating a carbon ‘subsidy’. And this is what the IMF has done in a widely publicised report issued yesterday (here):

A key factor in estimating the magnitude of current subsidies is which definition of “subsidies” is used. Pre-tax consumer subsidies arise when the price paid by consumers (that is, firms and households) is below the cost of supplying energy. Post-tax consumer subsidies arise when the price paid by consumers is below the supply cost of energy plus an appropriate “Pigouvian” (or “corrective”) tax that reflects the environmental damage associated with energy consumption and an additional consumption tax that should be applied to all consumption goods for raising revenues.

Generally, when we talk about externalities, we talk about costs rather than subsidies, but, like double-entry book keeping, these are two sides of the same concept. When consumer A transfers a cost to consumer B, we can think of consumer B subsidising consumer A. Continue reading

Charts du Jour, 10 April 2015: The IMF Grows Cautious on Growth

The potential for secular stagnation has been a consistent theme of this blog; in other words, we should entertain the idea of slow (or even zero growth) as a possible norm–and plan our lives so that we fully recognise this risk. Meanwhile, the discussion of permanently slower growth has migrated from ‘crankdom’ to mainstream in five short years, and now even the IMF is humming the same tune.

This week, the IMF pre-released a chapter from its flagship World Economic Outlook publication. The chapter is titled “Where Are We Headed? Perspectives on Potential Output“. It starts off by pointing out that in advanced economies growth was coming off even before the Great Recession hit in 2008 (on all charts, click for larger image):

Determinants of Potential Output Growth jpegAs the above chart shows, potential output growth can be divided into three components: 1) employment growth (more people or longer hours), 2) capital growth (more machines and computers) or 3) total factor productivity (better educated people plus innovation). The big decline was in the last category, which flies in the face of all the breathless cornucopian stories we here: tales of technology abolishing every human ill or want.

Furthermore, the IMF now increasingly recognises two stark realities. First, ageing societies will act as an increasing drag on growth in not only advanced but also emerging market economies and, second, total factor productivity gains are slowing in emerging economies as these countries get closer and closer to the innovation frontier of the advanced economies (moving from catch-up to caught-up). Continue reading

Greece: The Cyclical, the Structural and the IMF

In my last post, I outlined the IMF’s abysmal track record in charting Greece’s GDP growth path. The IMF’s initial Stand-By Arrangement (SBA) programme was expected to produce a single-digit dip in GDP followed by a rapid recovering. In reality, GDP has crashed by over 20% and we see no sign yet of any expansion.

In the Fund’s May 2013 “Greece: Ex Post Evaluation” publication, the IMF admitted some failings in its growth forecasting and its assessment of what would drive the recovery:

Competitiveness improved somewhat on the back of falling wages, but structural reforms stalled and productivity gains proved elusive.

Note that economic recoveries from recessions usually have two components: 1) the gradual removal of the gap between potential output and actual output as idle capital and labour is gradually put back to work, and 2) a pick up from long-term structural productivity gains as new technology becomes available. The former can be thought of as a short-term cyclical component of growth and the latter as a long-term structural component of growth.

The IMF’s biggest forecasting mistake was with respect to Greece’s true potential GDP. In short, as we headed into the Great Recession, Greece was probably in the situation of having actual GDP far in excess of potential GDP. Accordingly, the IMF expected the economy to rebound to an equilibrium that just did not exist. How could this be? Continue reading

Greece: A Tale of Two Consultations

The IMF certainly wasn’t responsible for Greece’s economic downturn; indeed, Greece only entered an IMF programme (jointly orchestrated with the European Commission and the European Central Bank—the so called Troika) through a Stand-By Arrangement (SBA) agreed in May 2010, 18 months after the collapse of Lehman Brothers in September 2008 (the fulcrum point for the credit crisis).

Nonetheless, the IMF’s track record in both evaluating Greece’s economic risk before trouble hit and in helping craft a set of coherent economic policies that would supposedly build the foundations for renewed growth has been abysmal.

Unfortunately for the IMF, we have a ‘before and after’ comparison in the form of the last two Article IV Consultations (the IMF’s economic health checks) of Greece, the first conducted on July 2009 before the recession bit (here) and the latest conducted in June 2013 after all hell had broke loose (here).

Let’s start with how we always keep score in economics: GDP growth. In the 2009 consultation, the IMF forecast that GDP would contract by 1.7% in 2009, followed by 0.4% in 2010, before seeing a return to 0.6% growth in 2011 and 1.2% in 2012. In their words:

Staff projects negative growth in 2009 and 2010. Greece is feeling the downturn with some delay. Moreover, even with the staff’s weaker outlook relative to the authorities, Greece’s growth decline from peak to trough would still be milder than for the euro-area as a whole.

Milder? The reality was far, far worse: -3.1% for 2009 and -4.9% for 2010. And then far from rebounding, the downturn picked up speed with the economy shrinking an extraordinary 7.1% in 2011. For 2012, the advance estimates have the economy down another 6% plus. This is a stunning forecasting failure: the IMF was off by around 20%—a fifth of GDP! Continue reading

Links for Week Ending 26th of January

  • The San Francisco Chronicle has a must-read article for anyone exposed to low-lying U.S. real estate (here). 
  • On my bookshelf is a wonderfully written book by science historian and physicist Spencer Weart called the Discovery of Global Warming. Via The Big Picture, I find that The American Institute of Physics is hosting a user-friendly hypertext accompaniment to the book that tells you everything you need to know about the discovery of global warming.
  • Bjorn Lomborg is in the news again with an Op-Ed piece at the Wall Street Journal. Climate Science Watch does the debunking here. Lomborg, like Matt Ridley, appears to have open access to the Wall Street Journal’s pages. If you come to his writings with no background in the subject nor knowledge of primary sources, he appears persuasive. I must admit to having given a copy of “The Skeptical Environmentalist” to my mother as a Christmas present many years ago (before I saw the error of my ways). His arguments contain one part truthfulness, to one part falsehood to one part misrepresentation. At the end of the day, you have to rely on what mainstream climate scientists say about Lomborg’s views—which is that much of what Lomborg says is plain wrong.
  • I recently came across the Weatherdem blog. My type of blog: solid, concrete analysis coupled with a call to action. I am currently trying to get my head around the IPCC’s new Representative Concentrations Pathways (RCPs)—the CO2 emission projections commensurate with a certain level of greenhouse gas warming; Weatherdem has a good post explaining the emission paths here.
  • The two Bretton Woods institutions have been missing in action when it comes to climate change. Fortunately, one now “gets it”. The World Bank’s “Turn Down the Heat” report released in November 2012 is a watershed. Even more encouraging is that the president of the World Bank Jim Young Kim has thrown his authority behind the awareness raising. This article by him in the Washington Post could not be more clear. And it’s personal: ‘My wife and I have two sons, ages 12 and 3. When they grow old, this could be the world they inherit. That thought alone makes me want to be part of a global movement that acts now.” Bravo. Now if only the IMF could get on board (it’s current coverage of climate risk is desultory).

Peak Oilers Now Welcome at the IMF

Taking a short interlude from my recent treatments of technology, I feel the need to do a quick post on Peak Oil’s continued transformation toward respectability. Some months ago, I highlighted the fact that the IMF had openly recognised the Peak Oil argument in even its most prestigious publication, the World Economic Outlook (see my post here). In particular, IMF staffers now appear to be thoroughly acquainted with the work of Steve Sorrell, who has provided us with some of the most in-depth reviews of the Peak Oil literature (see my post here).

Now, when I say ‘recognised’ that did not mean ‘accepted’. Rather, the IMF acknowledged in the World Economic Outlook that price alone had not brought forth sufficient supply or substitutability over a multi-year time frame, as had previously been predicted. Economists at the IMF, therefore, seem to have decided to widen their intellectual net to bring in some fresh ideas. Continue reading

Greece as the Canary in the Coal Mine for Collapse?

Much of the western media appears to view Greece as a morality play: hubris coming before a fall. But many of the elements that have brought Greece down have parallels in the larger economies: an ageing population, increased integration into the global economy, hollowing out of traditional industries, reliance on debt to sustain growth, dependence on increasing social transfers to offset inequality brought about by technological change and a widening energy import bill.

Greece joined the EU in 1981 and the eurozone in 2001 (with the  drachma abolished in 2002). This chart of Greece’s GDP growth rates from eurostat shows  the sharp reverse in the country’s fortunes (note that the forecast rates for 2012 and 2013 currently look hopelessly optimistic). Moreover, latest data for 2011, suggest the final figure will come in at around minus 7%.

Continue reading

Could Peak Oil Pose a Near-Term Risk?

In my last post, I noted how even the IMF has come to address the issue of Peak Oil, most explicitly in the April 2011 edition of their flagship publication World Economic World (here). From a risk perspective, the first take-away from the report is that the very inelastic short-term supply and demand curves for oil make the world economy (and individual wealth) highly vulnerable to any geopolitical disturbance in oil supply. The second take-away is that long-term demand is also highly inelastic, suggesting any substitution away from oil is problematic (for example, it would take decades to replace our petrol and diesel based car fleet with an electric-based alternative). However, neither of these conclusions directly address the issue of whether oil production could peak.

On the longer-term supply side, the central scenario in the IMF report is for an annual average growth rate in oil production of 1.5%,  while the the alternative ‘Peak Oil’ scenario (called Scenario 2 in the report) is for a decline of 2% per annum. How exactly these figures have been arrived at is left somewhat vague. The supply growth scenario appears an extrapolation of recent trends, while also being broadly consistent with the forecasts of the International Energy Agency (IEA). For the contraction scenario, a reference is given to a paper by Sorrell et al but no further details are provided. In other words, the IMF deftly avoids going into the peak oil controversy but just plucks out a couple of scenarios: 1) consensus oil cornucopia and 2) a mild oil descent.

The lack of an explicit treatment of the long-term supply side is somewhat puzzling, given that the IMF’s study feels able to put numbers onto the demand side (albeit with large caveats). In short, no light is shed on how price can introduce more capital expenditure and thus call forth more oil supply over the longer term and no information is given on how the supply curve moves through time due to the impact of technology.

Nonetheless, if you access the paper led by Steve Sorrell that is referenced by the IMF (here) you can find a treasure trove of information about a range of possible long-term oil supply outcomes, both optimistic and pessimistic. Unfortunately, the article is behind a pay wall (and costs $19.95 through the Science Direct website) but most of the contents are freely available in other publications Steve Sorrell has co-authored—particularly the The Global Oil Depletion Report from the UK Energy Centre—and in video and powerpoint presentations.

If you want to understand the main points Sorrell wishes to communicate directly, then I suggest you watch the video below (as the powerpoint charts are barely visible in the video, it is worth running this Powerpoint presentation concurrently as most of the slides overlap). For those time constrained, I have pulled out the most interesting points and charts in the rest of the post.

If I had to sum up Sorrell’s key messages, they would be these:

  • Consensus reserve estimates of oil reserves may be accurate (thus falsifying the claims of high profile Peak Oil exponents such as Colin Campbell), however this makes only a relatively small difference to the timing of a peak in production.
  • The critical issue is how easily (and cheaply) we can access resources rather than their ultimate size.
  • There is a significant risk that oil production will peak before 2020.
  • The assumption of a peak beyond 2030 appears at best optimistic and at worst implausible.

Sorrell starts his analysis by defining conventional oil as a combination of crude oil, condensates and natural gas liquids.

Sorrell notes that true unconventional oil currently accounts for only 3% of total ‘all liquids’ production and is projected by the IEA to only be a little over 10% by 2030 (the IEA’s Current Policies scenario sees 11.3 million barrels per day of unconventional oil production in 2030 out of a total of 103.9 mbd in their 2011 World Energy Outlook report). The IEA defines unconventional liquids to include biofuels plus unconventional oil which includes oil sands, extra heavy oil, gas to liquids (which is different from natural gas liquids), coal to liquids and kerogen oil.

Against this background, Sorrell stresses that if conventional oil depletes more quickly than expected, non-conventional oil will not be able to make up the difference over a 20 year time span. He then focuses on the supply dynamics of conventional oil, particularly on the physical constraints on production, and notes the following points:

  • Each individual oil fields follows a pattern of rise, peak, plateau and fall
  • Most production in a region originates from larger fields
  • Larger fields are relatively easy to find than smaller ones and are thus generally found first

The UK oil industry is used by Sorrell as a typical example. The largest fields such as Brent and Forties were found in the early stages of exploration. Further, the much smaller fields most recently discovered both peak earlier and decline quicker as well as produce less oil overall. Note that the recent numbers from the latest BP Statistical View of World Energy show UK oil production at 1.3 mb/d in 2010, down from 2.7 mb/d in 2000.

Economists please note (and I am one by training): during the period of UK oil production decline, the oil price has risen radically and deep sea drilling and extraction techniques have continued to improve. Nonetheless, the decline in production has been impervious to both price and technological trends. What is more, numerous other countries are now in the position of recording relentless output declines.

Sorrell then looks at the concept of ultimately recoverable resource (URR). In his words

The URR is the sum of cumulative discoveries, future reserve growth at known fields and the volume of oil estimated to be economically recoverable from undiscovered fields—commonly termed the yet-to-find (YTF).

Current estimates for URR are between 2,000 and 4,300 giga barrels (Gb), with giga meaning billion. If we take out what has already been produced, that leaves us with between 870 Gb and 3,170 Gb left to recover. (The IEA in its 2011 WEO report puts recoverable conventional oil resource at 2,800 Gb, and thus a URR of around 4,000 Gb.) Sorrel then goes on to make the critical observation that the year of peaking is remarkably insensitive to the actual URR:

Now you can alter the shape of the curve to delay the peak, principally by a) decelerating your oil production ramp up, or b) putting your peak off but at the expense of having oil production fall off a cliff at some point in the future. But neither action is a free lunch economically.

Sorrell then went on to analyse 14 forecasts of oil production out to 2030. Of these 14, five forecast no peak before 2030; these forecasts came from the IEA, OPEC, US Energy Information Administration (EIA), ExxonMobil and Meling (Statoil-hydro). The non-peak forecasts arrived at their conclusions through a combination of having higher URR estimates and assuming larger post peak declines:

The next critical question then is how realistic are the no-peak-before-2030 forecasts? Sorrell implies that such forecasts should not be judged as central scenarios but rather as at the edge of all possible outcomes for a number of reasons.

First, historical experience suggests that production curves are asymmetric—but not to the right of the peak but rather to the left. In other words, we see a fast ramp-up and then slow decline. Sorrell notes that of the 37 countries that have already experienced a peak, the peak took place at 26% (production weighted) of their URR (ultimate recoverable reserves). The more optimistic forecasts—like those of the IEA, EIA and OPEC—are implicitly looking for a peak at a much higher percentage of URR.

Second, the more optimistic studies assume that discovery trends will remain in place despite the fact that they have been on a long-term downward decline (although the IMF’s New Policies Scenario has quite conservative discovery rates of 8 Gb per year through 2035).

Third, many forecasts such as those by the IEA suggest that oil can be extracted from the newly discovered fields at a rate that has no historical precedent.

Following on from this analysis, Sorrell and his co-authors ended the paper cited by the IMF with this statement:

Given these complexities, we suggest that there is a significant risk of a peak in conventional oil production before 2020. At present, most OECD governments are failing to give serious consideration to this risk, despite its potentially far-reaching consequences.

From a risk perspective, this appears very sensible. We just don’t know when the actual conventional oil peak will take place and attaching a single point estimate appears a futile exercise. However, we do know that it could appear early or late. If early, this would imply that we have very little time to put in pace either non-conventional supplies or renewables. The result of a supply side conventional oil shock could thus inflict a major blow to global GDP (and, potentially, global political institutions).