Early Warning

European Unemployment Unchanged in December

2012-01-31T04:35:00.000-08:00

Eurostat today released the December unemployment rate estimates (graph above). December is unchanged over November. It's hard to read too much into any one month but I think this qualifies as good news: one might have feared that the damage to the real economy was going to accelerate, but instead it's slow and halting.

Still - unemployment is now higher in Europe than it was at the height of the recession following the 2008 financial crisis. It remains a bad situation that still seems likely to get worse before it gets better.

Current Drought in Mexico

2012-01-31T04:26:00.000-08:00

I feel a little parochial for not noticing this before, but the recent drought in Texas and the US Southwest extends over much of northern Mexico and is having an even bigger impact in that country: it's causing a food crisis in the less developed nation. The map above is from the North American Drought Monitor page at NOAA and shows the severity of the drought as of December 31st. It uses some scale that isn't clear to me and isn't the PDSI. Still the general idea seems clear enough.

This came to my attention because of a New York Times article:

A drought that a government official called the most severe Mexico had ever faced has left two million people without access to water and, coupled with a cold snap, has devastated cropland in nearly half of the country.

Reports that the Tarahumara were killing themselves in despair over starvation, later proven false, spurred residents of Mexico City to collect food and clothing donations.
The government in the past week has authorized $2.63 billion in aid, including potable water, food and temporary jobs for the most affected areas, rural communities in 19 of Mexico’s 31 states. But officials warned that no serious relief was expected for at least another five months, when the rainy season typically begins in earnest.

and

Among the more seriously affected communities are tribal areas of the Tarahumara indigenous community in the Sierra Madre, in the north. Known for endurance running and self-reliance, the Tarahumara are among Mexico’s poorest citizens. When false reports of a mass suicide brought on by hunger surfaced recently, journalists and aid organizations poured in to shed light on the situation.

“I think it has really become extreme poverty,” says Isaac Oxenhaut, national aid coordinator for the Mexican Red Cross. Mr. Oxenhaut recently visited the Indian communities where, he said, the land was too dry to grow any crops the Tarahumara usually depend on for their livelihood. “They don’t have anywhere to harvest absolutely anything,” he added.

You may recall from Thursday's post that analysis of the AR4 climate model runs (ie the ones used in the IPCC's 2007 report) suggests that Mexico is going to get absolutely pasted with drought in the future:

I tend to the view that regional details may not be very accurate in present climate models, but certainly if Mexico is experiencing a "most severe ever" drought event at the moment, that is consistent with the prediction.

December Global Trade

2012-01-30T05:55:00.000-08:00

You may recall that the other month I developed a methodology for seasonally adjusting the monthly world trade figures from the WTO. This revealed a sharp drop in global trade in October. I then went on to apply this to November, and today give preliminary figures for December (based on a sample of 19 countries that have reported so far). December (like November before it) shows some recovery from the October drop, but it is not yet back to the level of October. The agreement between Imports and Exports is only partial here (probably reflecting the noisy nature of the preliminary estimate).

Overall, it appears that global trade has flattened out since mid 2011, but the October drop has not led to a sustained contraction like 2008 (probably because the ECB has so far succeeded in preventing calamitous institution failure in Europe). It looks possible that some of the October drop may have been due to businesses waiting to the last possible moment to order Christmas merchandise thus meaning that some of the normal fall surge in the non-seasonally-adjusted numbers was delayed, causing a drop then a rise in the seasonally adjusted series.

Historical Note on Drought in Climate Models

2012-01-27T05:18:00.000-08:00

This morning, I stumbled on a 1999 paper "DETECTABILITY OF SUMMER DRYNESS CAUSED
BY GREENHOUSE WARMING" by Wetherald and Manabe. The paper discusses a single climate model (obviously a by-now very outdated one) which generates very serious drought across much of the world in the second half of the twenty-first century. The map above gives the general idea.

Much more refined predictions with averages over many far-more sophisticated models have only changed the picture a bit:

The paper's discussion of the physical mechanisms at work is interesting. There are separate discussions of the more northern interior of the US ("CNA1") and the more southerly portions of North America (eg Mexico, Texas - which they call "CNA2").

For CNA1:

In general, the increase of both CO2 and water vapor in the model atmosphere increases the downward ﬂux of longwave radiation absorbed by the continental surface. This results in an early disappearance of snow cover (with a large surface albedo), thereby increasing the solar energy absorbed by the continental surface. Because of the increase in the surface absorption of both longwave and solar radiation, evaporation is enhanced during spring and early summer (Figure 10a), reducing the soil moisture in the CNA1 region. By mid-summer, the soil moisture is reduced to the point where evaporation can no longer increase. Thus, evaporation is decreased and sensible heat increased, reducing the near-surface relative humidity and cloud cover, which increases insolation absorbed by the continental surface and makes more energy available for evaporation. On the other hand, the rate of precipitation hardly increases over the continents in summer because of the low relative humidity in the lower troposphere (Figure 10a). As a matter of fact, the rate of precipitation even decreases slightly after mid-summer when the soil becomes very dry. Therefore, the soil moisture anomaly remains negative throughout the rest of the summer and early fall in ‘CO2 + SUL’

In sharp contrast to the summer situation discussed above, soil moisture in CNA1 increases during winter in ‘CO2 + SUL’ (Figure 9a). Despite the increase in the downward ﬂux of longwave radiation, the rate of evaporation hardly increases over the continental surface in middle and high latitudes where the increase in the downward ﬂux is compensated mainly by the upward ﬂuxes of sensible heat and longwave radiation rather than latent heat ﬂux in winter. On the other hand, the rate of precipitation increases signiﬁcantly in the CNA1 region where the relative humidity in the lower troposphere is much higher in winter than in summer (Figure 10a). This is quite different from the situation in summer when the relative humidity in the lower troposphere is very low and precipitation hardly increases in this region despite the increase in the rate of evaporation in the surrounding oceans.

The increase in precipitation, together with the failure of evaporation to increase,
accounts for the increase of soil moisture in the CNA1 region during winter in
‘CO2 + SUL’.

By contrast: in the drier regions to the south:

In the CNA2 region, where there is little or no snow cover in spring, the monthly mean soil moisture is considerably below saturation during most of the year. Figure 9b indicates that the CO2-induced change in soil moisture is negative throughout the entire year and the maximum reduction occurs from summer to early winter.

As in CNA1, the reduction of soil moisture in CNA2 is attributable partly to the increased downward ﬂux of terrestrial radiation resulting from the increase of both CO2 and water vapor in the model atmosphere.

The increase in the downward ﬂux of longwave radiation raises the surface temperature, thereby increasing the rate of potential evaporation. As Figure 10b indicates, the increase in potential evaporation increases the evaporation from early winter to May when the soil moisture is relatively large. However, the CO2-induced change in the evaporation rate becomes slightly negative from summer to early fall when soil moisture is relatively small. On the other hand, the CO2-induced change of precipitation rate in the CNA2 region is negative throughout most of the annual cycle (Figure 10b), in sharp contrast to the situation over most of the globe where both evaporation and precipitation increase in response to the increasing atmospheric carbon dioxide. The failure of precipitation to increase is attributable partly to the reduction of near-surface relative humidity in these regions where a major fraction of radiative energy absorbed at the land surface is removed as sensible heat ﬂux rather than through evaporation.

The increase in potential evaporation together with the reduction of precipitation discussed above contribute to the general reduction of soil moisture shown in Figure 9b. The decrease of soil moisture, in turn, reduces the near-surface relative humidity and precipitation rate further throughout most of the year (Figure 10b). The reduced near-surface relative humidity induces a corresponding reduction of low level cloudiness, increasing the insolation reaching the continental surface and further enhancing the drying of the soil. This analysis applies equally well to other semi-arid regions of the world such as central Asia and the area surrounding the Mediterranean Sea.

The paper also predicted it would be a little while until the trend became clear above the natural variability:

Results of the ‘CO2 + SUL’ integration suggest that, over mid-continental regions of middle and high latitudes, the summer reduction and winter increase of soil moisture will not become noticeable until the ﬁrst half of the 21st century. An analysis of the central North American and southern European regions indicates that the time when the change of soil moisture exceeds one standard deviation about the control integration occurs considerably later than that of surface temperature because the ratio of the forced change to the natural variability is smaller for soil moisture than for temperature.

It does seem to be true that clear emergence of a drying trend has occurred later than clear emergence of a warming trend. However, now, a decade into the twenty-first century, we do seem to be getting there.

Another Terrifying Drought Paper

2012-01-26T06:13:00.000-08:00

The conviction has been growing in me for quite some time that the really big deal about global warming is increasing frequency and severity of droughts. If I've succeeded in convincing you of this too (or you already believed it for other reasons of your own), then you will be interested in a new paper by Wehner et al (a group of scientists at NOAA and US national labs) titled Projections of Future Drought in the Continental United States and Mexico. The full paper doesn't seem to be freely available on the Internet but there's a press release and also conference talk slides that will give you the flavor. Furthermore, a reader sent me a copy and I'll summarize the points that interested me here.

Let me start by explaining the figure above which is really the heart of the paper. The x-axis of the figure is time during the twentieth and twenty-first century. The y-axis plots the fraction of the area of the US and Mexico that is in at least moderate drought (PDSI less than -2). The red and black lines are based on two different estimates of the historical PDSI: both use the same code for generating the PDSI that NOAA uses for its regular drought monitoring but they use temperature/precipitation data series from different groups as the input to the PDSI calculation. Then the pale grey lines represent the (corrected) PDSI from nineteen climate model runs used in the IPCC AR4 process with the A1B emissions scenario (the world is currently tracking noticeably above this scenario). The purple line is then the average of the 19 model runs (ie all the grey lines which are too blurred together to really see well). Because the purple line is an average of 19 simulated worlds, it has much less fluctuations in than the one real world (red/black lines). Also, because climate models seem to systematically under-estimate drought in the twentieth century, the purple line is below the red line on average.

But here's the kicker: notwithstanding the fact that the models seriously underestimate the level of drought in the 20th century, by the end of the 21st century, their average has reached around a level a little above 0.6. And if you look over to about the mid 1930s you'll see a red spike - the worst year of the dust bowl - which extends to about 0.65 (hard to see the exact level in the figure above but you can see it clearly in the version in the slides). So the paper is saying that climate models predict a level of US/Mexican drought in 2100 that is comparable to the worst year of the dustbowl. As the press release puts it:

These models showed that the normal state for much of the continental United States and Mexico in the mid- to late-21^st century would be conditions considered severe to extreme drought by today’s standards.

Holy shit.

One interesting thing is that this new paper does not cite, and shows no awareness of, the line of papers by Dai and coauthors that I have covered extensively on this blog. While that's a flaw in the paper, it does mean that the broad conclusions of those papers have been reproduced completely independently by a different group of scientists.

Needless to say the conclusions here are terrible - if there is that much drought on a regular basis, lots of US forests will be turning into savannah (and savannahs into grasslands or deserts) and there will be huge releases of carbon dioxide from the biosphere - really nasty positive feedbacks that the climate models I'm quite sure are not capturing properly - and we are really going to turn our beautiful planet into a hell fit only for robots to live on.

If you want to see the best guesses as to the regional distribution of the problem, here they are:

This shows the change in the average PDSI in the models regionally. Note the scale - the dark brown is a full -4 shift: the new normal will be extreme drought by the standards of the past. So if this map is right, you can basically kiss Mexico goodbye altogether and the mountain west and great plains look terrible too. However, I wouldn't necessarily see the map as very certain for reasons I'll discuss in a moment.

Is there any escape from this conclusion?

Well, the one hope is that it turns out that the climate models really suck at reproducing the historical conditions of drought. This isn't as much comfort as it might be since it turns out they really want to under-predict the amount of drought, but such hope as there might be, it lies in there. In particular, when the authors first ran the PDSI calculation on the model temperature/precipitation variables, the models really grossly failed to explain the 20th century level of drought: it's the left picture in this pair:

The first thing the researchers noticed is that the models have a tendency to predict too much rain and not enough heat in some parts of the country. So they took the temperature and precipitation for each model, and for each simulation grid cell, and rescaled them so that the average over the twentieth century matched the actual average in the real world. Then they reran the PDSI calculations and that's the picture on the right (which is also the one at the top of the post). You can see that this adjustment hasn't really solved the problem in the twentieth century - though it's a bit better - but the prediction in the twenty-first century is pretty sensitive to this adjustment.

Presumably, the real problem is that the climate models aren't very good at producing the kind of long hot rainless summer that gives rise to killer droughts (like in Texas in 2011). The rainfall and temperature in the model probably lack sufficiently long auto-correlations to produce real world droughts. Still, just adjusting the model output to have the correct mean values before doing the PDSI doesn't seem like a crazy thing to do: although it's crude, it's hard to argue that it invalidates the right hand side figure. Still, the fact that the models clearly fail to capture the most important dynamics of drought should give one some pause.

Pretty much all the models predict more drought - that's a robust prediction that arises because the increasing temperature produces more moisture demand on the soil than the precipitation can supply, even where the latter is increasing. However, one story you might try to tell about how it might not be so bad: suppose climate change makes the weather less correlated (ie more changeable) so now it becomes very unlikely to have an entire hot summer, but instead you get a hot week or three and then a bunch of rain and cooler weather and then back again. That might produce less drought even in a warmer world, but climate models simply couldn't credibly predict this trend (or the reverse) since they do a rotten job of predicting the level of drought now.

Of course, there isn't the slightest reason at the moment to suppose the weather is going to get more changeable under anthropogenic climate change - it's just a place where you could park some doubt, if you really didn't want to believe this stuff. Right now, it looks a lot more likely that we really are headed into a future with a lot of killer droughts.

More research desperately needed. And more action on climate change from individuals and politicians too. Please.

European Industrial Orders Continue Slide

2012-01-24T05:22:00.000-08:00

Eurostat has produced the numbers for November industrial orders in the Eurozone and the EU as a whole. The picture continues to appear that Europe is sliding into recession, though not at a breathtaking pace. In this particular case, the Eurozone has retrenched to the low level of September, erasing the slight improvement in October. Meanwhile the broader EU continued to follow the Eurozone down.

Here are the changes relative to 12 months ago (Nov for most cases, Oct for a few):

Eastern Europe is mostly recovering, as is Ireland. Greece and Portugal have had a terrible year. Spain Germany and Italy don't look great either.

Of course, the negative developments in the real economy are going to feed back into the financial crisis. In a slowdown, more businesses will fail than usual, and more households will lose income or become bankrupt. That in turn will increase the strain on bank balance sheets as they get left holding the resulting bad loans.

The Significance of the Al-Naimi Price Comment

2012-01-18T07:47:00.000-08:00

Recently, Saudi oil minister Ali al-Naimi made some interesting comments to CNN about Saudi spare capacity:

I believe we can easily get up to 11.4, 11.8 (million barrels a day) almost immediately, in a few days, because all we need is to turn valves," Saudi Oil Minister Ali al-Naimi told CNN's John Defterios. "Now to get to the next 700 or so, we probably need about 90 days."

When asked about whether Saudi Arabia could make up for Iran's exports of 2.2 million barrels a day, al-Naimi said the country has a spare capacity "to respond to emergencies worldwide, to respond to our customer demand, and that is really the focus. Our focus is not on who drops out from production, but who wants more."

and oil prices:

"Our wish and hope is we can stabilize this oil price and keep it at a level around $100" for the average barrel of crude, al-Naimi said.

A good deal of attention has been paid to the second comment since previously the Saudis had said they were comfortable with an oil price of around $75.

Kevin Drum is sceptical of Mr al-Naimi:

This is a bit of a pet peeve of mine, so I'd like to offer an alternative explanation. Here it is: Neither the Saudis, nor anyone else, control the price of oil anymore. Saudi Arabia has very little spare capacity to speak of, and couldn't open the taps to bring the price of oil down even if it wanted to. So no matter what the price of oil is, that's approximately the price the Saudis say is fair. That way they don't have to admit that they no longer have the ability to seriously affect oil price movements.

This, by the way, is the same dynamic at work in OPEC meetings. They meet, they talk, and then they release a statement saying that they aren't going to increase production quotas because the current price is fair and "customers aren't asking for more oil." Well, of course they aren't. By definition, customers aren't asking for more oil as long as oil is selling at the market-clearing price. Which it is. Because if it's not, then the price goes up, and guess what? Markets clear and customers aren't asking for more oil. Nonetheless, this charade regularly gets played out anyway, because OPEC doesn't want to admit that their production quotas are mostly meaningless these days. With occasional exceptions (when the 2008-09 recession temporarily cratered oil demand, for example) OPEC countries are all pumping flat out and couldn't deliver much more oil if they tried.

Bottom line: be suspicious of any explanation that suggests OPEC or Saudi Arabia or anyone else "wants" oil prices to be at a particular level. There was a time when they really did, and when their opinions mattered. But that time is long gone.

Now I generally yield to no man when it comes to skepticism of Mr al-Naimi. And I continue to wonder why, if Saudi Arabia can just turn the valves to 11.8mbd, it was apparently not producing 10mbd when Mr al-Naimi said it would late last year.

However, I do think his comments might have one point of significance. If you are betting on oil prices falling at the moment (for example if you judge that a European recession and a Chinese slowdown will put a crimp in demand), then you've got to be very aware that during the last recession Saudi Arabia (with a few key OPEC allies) cut production sharply at the end of 2008:

in order to support prices:

After falling as low as $40 in the aftermath of the financial crisis, the Saudi production cuts brought them back to around $70 give or take - fairly consistent with the $75 that King Abdullah had said was a fair price in November 2008.

So, now, in betting against oil prices you'd have to worry that the one power Saudi Arabia does have is to make sure that oil prices don't go far under $100 for very long. Since Brent is about $110 as of this writing, that leaves a lot more room for it to increase than to decrease.

Chinese Property Prices

2012-01-18T07:23:00.000-08:00

If you weren't aware of the above trend, well, know you are. Figure is from Bloomberg via FT Alphaville (the latter has become the indispensable blog through the European crisis).

OPEC: Oil Production Still Rising

2012-01-16T09:15:00.000-08:00

Global oil production rose by about a half million barrels/day in December according to OPEC. So fears over Iran, Nigeria, Kazakhstan remain largely just fears - not that something couldn't happen, but so far global liquid fuel production is still rising. The IEA will come out with their numbers on Wednesday and I will update all my monthly graphs at that time.

According to OPEC (based on "secondary sources") Saudi production was pretty much flat over the November level: 9.763mbd in December versus 9.783 in November. Still no sign of the 10mbd Mr Al-Naimi was claiming.

European Industrial Production

2012-01-13T06:59:00.000-08:00

Eurostat has published November numbers for industrial production (graph above). It continues to look as though Europe is in the early stages of a recession.

Regional Misery Distribution

2012-01-12T08:34:00.000-08:00

Apropos of the latest Archdruid report, I went in search of some data on the geographic distribution of long-term income growth in the US. So far, the most useful thing I found is this Brookings Institute interactive map. It's not exactly what I'm looking for but the above shows the change in median household income 2000-2010 by metropolitan area.

That's a pretty bleak looking map isn't it? There's hardly anywhere in the country that ordinary folks improved their lot over the last decade. Still - some places are worse than others with the midwest and upper south and Florida being hardest hit. Across these areas, median income declined 15-25%: that's a really dramatic change in material standard of living. It's also worth noting that it's even worse than it looks in the sense that the blue circles are on a quite different scale than the red circles.

I also made the same map for 2000-2007 to see how much of this is due to the housing bust:

You can see that the pain in the midwest was already severe (and was going on well before 2000) but was considerably worsened by the recession (check the difference in map scale). The pain in California and Florida is largely since the housing bust.

The Archdruid puts the end of progress down to the end of cheap energy. I'm inclined to give a minor role to the end of cheap oil since 2005 (coal is still incredibly cheap) but think that most of the red on the map is due to the effects of globalization on the US industrial regions, and on income inequality generally - globalization benefits the managers and owners of global corporations while hurting ordinary US workers (and benefitting Asian workers). It's also worth noting that the reference year (2000) was the height of the tech bubble.

Where I agree with the Archdruid is that it's rather hard to see how this turns around in the next decade.

What I'd like is a map of the age of the pain - how long ago did median household income peak in each region?

Oil Prices

2012-01-11T05:37:00.000-08:00

I have been generally bearish on (Brent) oil prices for the last few months on the reasoning that the situation in Europe had to get worse before it got better. I am becoming less certain about the direction of prices in early 2012.

One factor in my shifting stance is an emerging sense that the ECB really is doing all manner of strange and creative things to ensure that major European financial institutions don't fail (which they very likely would do if left entirely to their own devices). The auction in 3 year LTROs in December was a landmark, and now comes this fascinating FT Alphaville piece. It's hard to find a suitable excerpt and you should read the whole thing but the essence is that banks in Europe can now issue bonds that are never marketed to the public and then turn them over as collateral to borrow from the ECB. This considerably stretches the traditional definition of the role of the lender of last resort (from Bagehot in the 19th century)

Secondly. That at this rate these advances should be made on all good banking securities, and as largely as the public ask for them. The reason is plain. The object is to stay alarm, and nothing therefore should be done to cause alarm. But the way to cause alarm is to refuse some one who has good security to offer. The news of this will spread in an instant through all the money market at a moment of terror; no one can say exactly who carries it, but in half an hour it will be carried on all sides, and will intensify the terror everywhere. No advances indeed need be made by which the Bank will ultimately lose. The amount of bad business in commercial countries is an infinitesimally small fraction of the whole business. That in a panic the bank, or banks, holding the ultimate reserve should refuse bad bills or bad securities will not make the panic really worse; the 'unsound' people are a feeble minority, and they are afraid even to look frightened for fear their unsoundness may be detected. The great majority, the majority to be protected, are the 'sound' people, the people who have good security to offer. If it is known that the Bank of England is freely advancing on what in ordinary times is reckoned a good security—on what is then commonly pledged and easily convertible—the alarm of the solvent merchants and bankers will be stayed. But if securities, really good and usually convertible, are refused by the Bank, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse...

Obviously, a bond that a bank created for the sole and express purpose of pledging as collateral to the central bank is not a "good" security in the sense intended here and the need for these measures suggests that is currently not the case that the "amount of bad business in commercial countries is an infinitesimally small fraction of the whole business".

This suggests to me that Europe is moving to a Japan style solution in which large numbers of zombie banks are kept afloat by the authorities (for fear of the disaster were they to collapse) and gradually earn their way out of trouble but in the meantime inhibit the economy by their very cautious lending. Combining that with fiscal austerity all round suggests a long grinding stagnation in Europe. Still, that is a very different thing than an abrupt crisis, and in particular need not be associated with a large crash in European oil demand.

And on the other hand we have the low level undeclared war being fought against Iran with a steady drumbeat of mysterious explosions and assassinations (the most recent just yesterday) as well as ongoing efforts to prevent Iran from selling its oil. Iran in turn is making threats about the Straits of Hormuz.

Whether this is all bluster that will pass over without major ramifications is tough to say. And therefore I am now quite uncertain about the future direction of oil prices.

Current European Drought Map

2012-01-10T05:23:00.000-08:00

I found the above map via the European Drought Center, but the map itself is hosted at the EC Joint Research Center Institute for Environment and Sustainability.

The map is for Sunday 8th January 2012 and represents departure of soil moisture from normal conditions for that time and place. It is not a PDSI map: instead the -4 to 4 values are the number of standard deviations away from the 1990-2006 conditions (at each particular place and time of year). This is a relatively recent baseline and as such these anomaly figures will not be able to detect much global warming signal. In any case, it appears that Spain, and much of Italy, Greece, Eastern Europe are exceptionally dry for this time of year, while most of northern Europe is exceptionally wet. Apparently rainfall is inversely correlated with the 10 year sovereign bond yield!

There is also a forecast map for Jan 16th 2012 (ie next week):

This is based on a somewhat longer 1958-2001 baseline but tells a broadly similar story: much of the Mediterranean is expected to be very dry while northern Europe is wetter than normal.

The similarities with the pattern that has obtained in the US for the last year are striking:

Prime Age Men Crawling Back to Work

2012-01-09T06:12:00.000-08:00

My favored employment indicator is the employment-population ratio for working-age men (25-54):

The last couple of months have seen an uptick in this and the ratio can be seen to have been very, very, gradually recovering since the end of the last recession (which was officially in June 2009). At this pace, we will return to the pre-recession level some time in the late 2030s. I jest not:

However, looking at the longer term history:

What is overwhelmingly more likely is that the ratio will not recover to the pre-recession level before a new shock arrives and knocks it lower yet.

I continue to be amazed that this data - together with its causes and implications - are not at the center of our economic-political discussions. The importance of hard work and self-discipline has been a central value of western culture for many centuries (if not millenia). One in five working age men are no longer working (or not in any way that society is able to measure at least) and as far as I can see there is little or no hope of a fundamental reversion in this trend. We are going to have to either a) change the situation in the economy, or b) undergo a massive values shift to give honor and meaning to men who don't work, or c) experience a major crisis.

Current US Drought Map

2012-01-06T05:41:00.000-08:00

To strengthen my (and hopefully your) intuition for the Palmer Drought Severity Index I'm going to try and post the current US map on a monthly basis. For more background on the Palmer Index see this post.

The map for the week through Dec 31 is shown above. You can see that most of Texas is still in the grips of an extreme drought and a lot of the southeast is also pretty badly off. This continues a pattern that lasted through most of last year in which a lot of the southern half of the country was very dry while the northern half was unusually soggy. However, the southern droughts are not as extensive now as they were at their height in August.

You can see a nice animation of the monthly PDSI for the whole of 2011 at NOAA's site.

You can also construct longer movies of any portion of the twentieth century you'd like to watch - for example here's one of the dust bowl years. We still haven't managed to create anything that bad (in general most of the US has been trending wetter not drier under global warming) .

Eurozone Retail Trade Falls Below 2009 Trough

2012-01-06T05:18:00.000-08:00

Eurostat has released Novemember retail trade figures and the retail economy continues to contract:

It was contracting slowly all last year but the contraction seems to be accelerating slightly. One noteworthy milestone is that in the Eurozone (pink line) retail trade (on a real and seasonally adjusted basis) has now fallen below the lowest levels of the 2008-2009 recession. So the partial recovery in late 2009 and 2010 has been entirely wiped out.

There are wide disparities in where the pain is falling. This graph shows year over year change in retail trade (in most cases for November but in a few cases for October where the former is not disclosed yet):

The pain is very great in Greece, Portugal, and Spain - and not much better in Denmark and Bulgaria.

Some relief on Eurozone Industrial Orders

2012-01-05T04:28:00.000-08:00

September's industrial new orders number for the Eurozone was very bearish indeed but it looks like in October things improved slightly from there. I continue to think that this is the beginning of a new European recession but the jury is still out on its depth and length. The critical thing there will be whether the European authorities manage to avoid a disorderly failure of any large governments or financial institutions. If they continue to muddle through, as they have been, with neither a clear and convincing resolution of the crisis but nor with allowing critical institutions to fail, then I expect a longish but not incredibly deep recession. On the other hand, if they allow some kind of "Lehmann-type" event to occur then the crisis could turn very abrupt and the recession get much deeper in a hurry.

In other news - December inflation is estimated at 2.8% - still not particularly low.

Modern Cities are Hard to Kill

2012-01-04T09:53:00.000-08:00

I have a hard time believing that a city in an ancient civilization would have coped anything like that well with a similar disaster (think Angkor for example). This is quick bit of lunchtime research inspired by this Open Mind post - New Orleans seems like a prototype for worst case scenarios for cities that experience failures in their response to 21st century sea level rise.

I stress I'm not trying to minimize the enormous suffering of the people of New Orleans - just pointing out that the city is still there and has a functioning economy that is only slightly smaller than before the disaster. New Orleans is clearly not going to end up as ruins in the bayou as a result of Katrina.

The data are from the BEA.

Lots More Killer Summers on the Way

2012-01-04T05:26:00.000-08:00

In discussion on yesterday's post, commenter Chris R. pointed me to another recent Hansen paper (with coauthors M. Sato and R. Ruedy) Climate Variability and Climate Change: The New Climate Dice. I will explain the thrust of the paper by focussing on this part of Figure 4:

I imagine most of my readers are educated enough to recognize that this is some kind of probability distribution and that it's shifting over time - but probability distribution of what? Well, take the temperature in a 250km by 250km cell of the earth's surface and compute the average for each summer (the months of June, July, and August). Obviously, some summers are warmer than others so these summer averages will fluctuate, but on the whole we expect summers to have been getting warmer in most places on account of global warming. To explore how these trends are changing what Hansen et al do is find the mean and standard deviation for each cell from 1951 to 1980 and use that to rescale all the individual summer averages. That makes the entire global population of cell-summers comparable (in the sense that they have the same average and width of distribution over 1951-1980 after rescaling) so they combine all the summers from all the cells and compute the histograms by decade. That's the result above.

So the way to read the x-axis scale is that "-2" say is a summer that would be "two sigmas" below the average summer for a particular location and would thus be an unusually cool summer that we would only expect to occur in a few percent of years (assuming the 1951-1980 climate), while a "+3" is an extremely hot summer that would likely be hotter than any summer in living memory (again, assuming a stationary climate like that of 1951-1980).

So, as we would expect, the distributions shift to the right over time - in the 2000s, an average summer would have been a "+1" - one sigma above the mean - in 1951-1980. However, the really eye opening thing is that the distributions are not just shifting to the right but also getting broader - by a lot. What that means is that the probability of extremely hot scorching summers is getting bigger much faster than we'd expect just from the shift in the mean temperature. The globe is not just getting warmer, it's also getting more variable in temperature at the same time and this increase in variability is really noticeable.

For those of us over about 40, you can basically think of the baseline period 1951-1980 as "like my childhood". So then a "+2" would be roughly "hottest summer in my childhood". A "+3" would be "a summer that would have been the hottest in living memory - almost inconceivably hot in the climate I grew up in". But by the 2000s, such a summer would occur in about 10% of the years in that same location (This is the global average chance - some places have done better, others worse. You'll have to make the obvious corrections if you've moved around).

Thus it becomes almost immediately obvious that events such as the Moscow 2010 summer or the Texas 2011 summer are indeed features of the new climate and would have been very unlikely had the climate not shifted. It's also clear that there's much worse on the way. Indeed, the first thing I wanted to do when I saw the figure above was construct the extrapolation. So I did my own hand fit to Hansen et al's figure in order to extract the mean and standard deviation of the rescaled summers - these look like this:

You can see that the distribution is getting broader at about half the rate that it's moving rightwards (ie to the hot).

That let me make this extrapolation for the 2050 climate:

You can see my fits to Hansen et al's data as the thin lines, but the main point of the figure is the heavy plum colored line which is my 2050 extrapolation. So this is what to expect by mid century if recent trends continue. There's no guarantee that they will of course, but it's probably a better guess than anything else. And if they do, we are looking at the average summer being almost a "+2" on the 1951-1980 scale. And the "+3" "hotter than living memory" type events will be occurring around 1 year in 4 or so. And "+4" and "+5" events that would have been completely inconceivable will be happening often enough to notice - you'll likely experience a "+4" summer for your climate and, at a minimum, you'll be reading about the "+5" events in the news if you are lucky enough not to experience one.

This does not mean that every summer will be a killer summer. The broadening of the distribution means that it's still possible to very occasionally get to very cool "-2" summers. A "cooler than average" summer in the 1951-1980 distribution will become a 1 in 5 event in 2050 rather than a 1 in 2 event - but they won't stop altogether. Still, under these circumstances, it's perhaps not surprising that PDSI projections are saying there will be a lot more drought.

Nothing is going to be the same.

Hansen Still Argues 5m 21st C Sea Level Rise Possible

2012-01-03T06:19:00.000-08:00

This is interesting - here is the latest paper from James Hansen and coauthor Miki Sato Paleoclimate Implications for Human-Made Climate Change. If you are up to reading climate science papers it's highly recommended (I'm a little slow in getting to it - the press release was Dec 8th 2011 but I just got to reading it yesterday and today).

A little background is in order - one of the serious scientific debates in the climate science community over the last decade has been the implications of the unexpectedly large acceleration of glacier discharge in Greenland and Antarctica and in particular a discovery by Zwally et al in 2002 that surface melt water can get down to the base of a glacier and lubricate its motion. Prior to the early 2000s it was assumed that ice sheets would decay mainly by melting on the surface and climate models all assumed that they would decay only very slowly in a warmer world - it was a surprise to realize that the most important breakdown mode was actually basal lubrication and sliding down into the ocean.

Hansen in particular became the leading spokesman for the view that the ice sheets on Greenland and parts of Antarctica would prove quite unstable under Anthropocene conditions and might break down in a rapid non-linear manner and cause very large levels of twenty-first century sea level rise. See for example this essay from 2005 in which he says:

Consider the situation during past ice sheet disintegrations. In melt-water pulse 1A, about 14,000 years ago, sea level rose about 20 m in approximately 400 years (Kienast et al., 2003). That is an average of 1 m of sea level rise every 20 years. The nature of glacier disintegration required for delivery of that much water from the ice sheets to the ocean would be spectacular (5 cm of sea level, the mean annual change, is about 15,000 cubic kilometers of water). “Explosively” would be an apt description, if future ice sheet disintegration were to occur at a substantial fraction of the melt-water pulse 1A rate.

Are we on a slippery slope now? Can human-made global warming cause ice sheet melting measured in meters of sea level rise, not centimeters, and can this occur in centuries, not millennia? Can the very inertia of the ice sheets, which protects us from rapid sea level change now, become our bete noire as portions of the ice sheet begin to accelerate, making it practically impossible to avoid disaster for coastal regions?

This kind of nigh-apocalyptic rhetoric from a very senior and respected climate scientist provoked a flurry of papers in response seeking to analyze the situation. Most of these suggested various reasons why 21st century sea level rise, while likely worse than previously projected (for example in the 3rd IPCC report in 2001), would not be as bad as the worst fears of Hansen. Hansen and Sato's own description of this new literature seems fair to me:

Rahmstorf (2007) made an important contribution to the sea level discussion by pointing
out that even a linear relation between global temperature and the rate of sea level rise, calibrated with 20th century data, implies a 21st sea level rise of about a meter, given expected global warming for BAU greenhouse gas emissions. Vermeer and Rahmstorf (2009) extended Rahmstorf's semi-empirical approach by adding a rapid response term, projecting sea level rise by 2100 of 0.75-1.9 m for the full range of IPCC climate scenarios. Grinsted et al. (2010) fit a 4-parameter linear response equation to temperature and sea level data for the past 2000 years, projecting a sea level rise of 0.9-1.3 m by 2100 for a middle IPCC scenario (A1B). These projections are typically a factor of 3-4 larger than the IPCC (2007) estimates, and thus they altered perceptions about the potential magnitude of human-caused sea level change.

Alley (2010) reviewed projections of sea level rise by 2100, showing several clustered around 1 m and one outlier at 5 m, all of these approximated as linear in his graph. The 5 m estimate is what Hansen (2007) suggested was possible under IPCC's BAU climate forcing. Such a graph is comforting – not only does the 5-meter sea level rise disagree with all other projections, but its half-meter sea level rise this decade is clearly preposterous.

However, the fundamental issue is linearity versus non-linearity. Hansen (2005, 2007) argues that amplifying feedbacks make ice sheet disintegration necessarily highly non-linear, and that IPCC's BAU forcing is so huge that it is difficult to see how ice shelves would survive. As warming increases, the number of ice streams contributing to mass loss will increase, contributing to a nonlinear response that should be approximated better by an exponential than by a linear fit. Hansen (2007) suggested that a 10-year doubling time was plausible, and pointed out that such a doubling time, from a 1 mm per year ice sheet contribution to sea level in the decade 2005-2015, would lead to a cumulative 5 m sea level rise by 2095.

Nonlinear ice sheet disintegration can be slowed by negative feedbacks. Pfeffer et al.
(2008) argue that kinematic constraints make sea level rise of more than 2 m this century
physically untenable, and they contend that such a magnitude could occur only if all variables quickly accelerate to extremely high limits. They conclude that more plausible but still accelerated conditions could lead to sea level rise of 80 cm by 2100

I had been following this debate and reading the papers in question and had been somewhat reassured that 21st century sea level rise would be not too problematic for civilization at large (though it clearly would be very painful for coastal property owners and jurisdictions).

(Before we go on it's worth emphasizing the important aside - hardly any climate scientists doubt that huge quantities of the Greenland and Antarctic ice sheets would eventually melt and cause tens of meters of sea level rise as a result of human climate modifications - the debate is solely about how much of the consequences of our actions we will experience in the 21st century).

However, Hansen is not reassured by these new papers and is doubling down:

The kinematic constraint may have relevance to the Greenland ice sheet, although the assumptions of Pfeffer at al. (2008) are questionable even for Greenland. They assume that ice streams this century will disgorge ice no faster than the fastest rate observed in recent decades. That assumption is dubious, given the huge climate change that will occur under BAU scenarios, which have a positive (warming) climate forcing that is increasing at a rate dwarfing any known natural forcing. BAU scenarios lead to CO2 levels higher than any since 32 My ago, when Antarctica glaciated. By mid-century most of Greenland would be experiencing summer melting in a longer melt season. Also some Greenland ice stream outlets are in valleys with bedrock below sea level. As the terminus of an ice stream retreats inland, glacier sidewalls can collapse, creating a wider pathway for disgorging ice.

The main flaw with the kinematic constraint concept is the geology of Antarctica, where large portions of the ice sheet are buttressed by ice shelves that are unlikely to survive BAU climate scenarios. West Antarctica's Pine Island Glacier (PIG) illustrates nonlinear processes already coming into play. The floating ice shelf at PIG's terminus has been thinning in the past two decades as the ocean around Antarctica warms (Shepherd et al., 2004; Jenkins et al., 2010). Thus the grounding line of the glacier has moved inland by 30 km into deeper water, allowing potentially unstable ice sheet retreat. PIG's rate of mass loss has accelerated almost continuously for the past decade (Wingham et al., 2009) and may account for about half of the mass loss of the West Antarctic ice sheet, which is of the order of 100 km^3 per year (Sasgen et al., 2010).

PIG and neighboring glaciers in the Amundsen Sea sector of West Antarctica, which are also accelerating, contain enough ice to contribute 1-2 m to sea level. Most of the West Antarctic ice sheet, with at least 5 m of sea level, and about a third of the East Antarctic ice sheet, with another 15-20 m of sea level, are grounded below sea level. This more vulnerable ice may have been the source of the 25 ± 10 m sea level rise of the Pliocene (Dowsett et al., 1990, 1994). If human-made global warming reaches Pliocene levels this century, as expected under BAU scenarios, these greater volumes of ice will surely begin to contribute to sea level change. Indeed, satellite gravity and radar interferometry data reveal that the Totten Glacier of East Antarctica, which fronts a large ice mass grounded below sea level, is already beginning to lose mass (Rignot et al., 2008).

However, probably their main point is that the data we have on the Antarctic/Greenland meltdown is relatively short and is consistent with the idea that it's doubling with a relatively short (decade or less) timescale and if you extrapolate that out over the 21st century you get to very large values of sea level rise (a point I made in a blog post back in 2006). This leads them to include this figure (which I take to be a conceptual sketch rather than an exact forecast):

The picture that emerges is a relatively slow manageable sea level rise in the first part of the century followed by increasingly catastrophic levels of change in the latter part of the century as the rapid breakdown of the ice sheets overwhelms everything else.

I take Hansen's opinions very seriously. It's certainly true that there isn't enough data to rule out this scenario yet (though another decade of data should help a lot). Obviously at this point he hasn't succeeded in persuading most of his colleagues, but neither have they persuaded him. Only more data is likely to resolve the situation.

Amazon Wish List

2012-01-02T07:18:00.000-08:00

Every so often someone contacts me wishing to donate money to the cause of this blog and desiring me to add a tip jar to facilitate that. On the whole I'd just as soon keep the blog non-commercial since my day job amply covers my family's needs. However, there are times when I want to buy books but am restrained by the desire to keep the book budget from reaching astronomical proportions. It occurs to me that this is a way that readers could contribute to the blog and so I've created an Amazon wish list out of the (several years of) deferred items in my cart there.

So if you are one of those people so moved, check it out: there are items ranging from a few bucks into the hundreds for various academic tomes on climate and an astounding $2300 for a used copy of "Sedimentary Basins and Petroleum Geology of the Middle East" (which I would love to have should any of my billionaire readers be so moved). So there are opportunities to give at any plausible expenditure level. There's also a button over in the right hand sidebar of the blog for long term access to the list.

European Manufacturing Still Contracting?

2012-01-02T04:28:00.000-08:00

So saith Markit in their latest Purchasing Managers Survey. The above graph shows the historical correlation between the PMI and change in actual output according to Eurostat. Markit is below the 50 level associated with contraction, but nowhere near as bad as 2008 (yet, anyway). In other news - Italian 10 year bonds have been back over 7% throughout the holiday season:

So Europe is still some way from having resolved its problems.

Interesting Figure

2012-01-01T10:55:00.000-08:00

The above is taken from a paper by DAL Leelamanie Changes in Soil Water Content with Ambient Relative Humidity in Relation to the Organic Matter and Clay. It shows measurements of the moisture content of various experimental soil mixtures in equilibrium with air at differing relative humidities. The point of interest to me is not the specifics of which kind of soil retains how much water, but rather that in all cases the soil moisture content is roughly proportional to the relative humidity of the air, and thus that a ballpark 20% change in average relative humidity would be expected to make sizeable impacts on the water content of the soil.

More Paleoclimate Vegetation Maps

2012-01-01T07:36:00.000-08:00

Continuing the holiday theme of drought/climate explorations, I found some more vegetation maps for ancient climate states, which I'd like to document here for future reference. First let me borrow a few temperature history graphs from Wikipedia to orient readers who may not be familiar with major features of the global temperature history. The first one shows the last 65 million years of estimated temperature:

Note the boxes on the bottom which document the geological epochs: Paleocene, Eocene, Oligocene, Miocene, Pliocene, and Pleistocene. The oldest vegetation map I've found is for the Miocene - an era warmer than either the Pliocene or Pleistocene since. The map is from here and it's highly recommended to read the article at the link for a flavor of the Herculean scientific labors that are involved in constructing a map like this.

The top is modern, and the bottom is Miocene. The striking thing about the Miocene is that there is basically no desert anywhere - in contrast to the Pliocene (discussed yesterday and Friday) where there are small deserts (by modern standards):

So the Miocene seems to have been both warmer and wetter than the Pliocene.

This next temperature graph shows the last 5.5 million years of estimated temperature history based on sediment cores.

I have added a green box to the Pliocene period prior to about 2.5mya, and a grey box for the Pleistocene - the period since (except for the last 11,700 years) which comprises the period of sharp glaciation/interglacial cycles and has generally been cooler than the Pliocene (which in turn was cooler than the Miocene before it). Focusing in on just the last 800,000 years of the Pleistocene (for which there are Antarctic ice cores):

You can see the peaks of interglacials and the troughs of the ice ages. I have marked the LGM=Last Glacial Maximum - the height of the most recent ice age about 18,000 years ago. So that was a climate much colder than today in which Canada, parts of the Northern US, Britain, and Scandinavia were all covered in permanent ice sheets. And the vegetation map looked as follows:

In these simplified maps the white is the grassland/scrubland/savannah that represents regions too dry to support forest but not so dry as to be deserts. Clearly the LGM climate was very dry compared to modern climates with much shrunken forests and massive deserts. If we focus in on the last 12000 years (what is known as the Holocene - the current interglacial during which agriculture and civilization have arisen) the temperature history looks as follows:

Note the temperature was a bit warmer in the early Holocene - about 8000 years ago was the "Holocene Climate Optimum" when the vegetation map was as follows:

Note the absence of a Sahara desert - the Holocene optimum was a wetter world than the modern one:

It would appear that it didn't take all that large a temperature increase to cause a weaker Hadley cell and result in far less desert at mid-latitudes.

Again it seems to me that it's a critical point to look at the temperature graph:

and note that the temperature is only changing by about 0.1^oC - 0.2^oC in a millenium. This is in contrast to the modern rate of about 1.6^oC/century. We are moving the climate about two orders of magnitude faster than pre-industrial holocene change. In particular, with a turnover time of around a thousand years, the ocean in the mid-Holocene optimum was presumably far closer to equilibrium with the rest of the climate system than it is in the twenty-first century.

Krugman on British Debt/GDP levels

2011-12-31T13:48:00.000-08:00

Paul Krugman keeps posting the graph above of British public debt to GDP (arguing that modern levels of British debt are not a problem - and by extension other countries with their own currency).

But shouldn't it be noted that prior to the 1950s, Britain had a large empire which it could and did tax? I seem to remember that caused some annoyance in certain colonies. Thus the economic base that could be used to service British public debt was much larger than indicated by Gross Domestic Product, no?

Hadley Circulation in the Pliocene

2011-12-31T07:03:00.000-08:00

I have been continuing my attempts to understand why trends and predictions for global drying under global warming are in the opposite direction from the Pliocene climate. I have had a little email back and forth with Aiguo Dai (author of many of the PDSI papers I have been referring to in this series of blog posts) and he reminds me of the importance of the Hadley cell in driving the desert areas of the globe in this map from yesterday:

The Hadley cell is a name for the main climatic mechanism operating between the tropics and about 30^o north and south of the equator:

What happens here is that at the equator air is warmed by the strong sun, as well as made moist by the high sea surface temperature (SST) there so that warm moist air rises (dropping lots of rain on tropical rainforests in the process) and then spreads out polewards at a height of 10-15km before descending back to earth at around 30^o north and south. Having lost much of its moisture in the ascent, the air is dry when it descends and this gives rise to the various deserts north and south of the equator. The actual pattern of ascent and descent in the modern climate is well illustrated in this figure from the Wiki:

Here the blue is ascending air velocity and the pink is descending.

Now, since the Pliocene climate apparently involved much less desert:

it seems that it must have had a weaker Hadley circulation. Why so? The best story I've been able to find is in Brierley et al Greatly Expanded Tropical Warm Pool and Weakened Hadley Circulation in the Early Pliocene. This 2009 Science paper argues based on evidence from fossil fauna that the SST distribution in the Pliocene involved warm surface temperatures 15^o further north and south than at present:

The main point here is the difference between the soft grey line (postulated Pliocene) and modern (thin solid black line). Note the huge shift - we are talking about 10^o-15^oof latitude so in the ballpark of a thousand miles in both directions. Obviously this chart relies on a rather small number of data points and the need to translate from the Atlantic speaks volumes - so it's probably indicative rather than dispositive.

Anyway - when they put this much larger tropical warm pool into an atmosphere-only climate simulation the Hadley circulation decreases substantially:

The Northern Hemisphere branch of the Hadley circulation weakens on average by roughly 30%. During boreal winter, the reduction reaches nearly 40%. The center of the Hadley cell moves northward by ~7°, whereas the cell’s latitudinal extent (26) increases by 3° to 4°. These changes of the Northern Hemisphere circulation are a robust response to changes in meridional SST gradient as evinced by additional sensitivity calculations (table S2). The volume transport of the circulation’s southern branch nearly halves, making the southern Hadley cell even weaker than the northern cell. Whether this is a genuine feature of the early Pliocene climate remains to be seen, because there are only a few SST data points currently available in the Southern Hemisphere

This makes sense as much warmer water at the bottom (descending) leg of the Hadley cell is going to reduce the temperature difference between northern and southern ends of the cell that drives the circulation. And in their simulations, this indeed shows up as fewer subtropical dry zones:

You want to look at the shrinkage of the pale/violet zones in the Pliocene map at bottom. So the picture that emerges is that the Pliocene climate involved more widespread (and gentler) rainfall than the pre-industrial modern climate but that this was predicated on a much warmer ocean that extended tropical conditions much further north and south than the present ocean temperature distribution.

So again this points me in the direction of thinking about the difference in response times here - the ocean takes around a thousand years to completely turn over so presumably it's going to take around that amount of time before it has fully responded to the changes humans are making in the atmosphere - the present deep ocean water knows nothing about what we've done and it will presumably continue to well up into (and thus cool) the surface ocean for hundreds of years to come. Look at this last map which comes from NASA GISS and shows the estimated temperature change between 1880-1900 and 2000-2010:

Clearly the oceans have warmed much less than the land - and a lot of the eastern Pacific has barely warmed at all (presumably because this is the site of a lot of upwelling of deep old ocean water).

Thus even if we've created a Pliocene concentration of carbon dioxide in the atmosphere, it will be a long time before we have a Pliocene ocean and thus a Pliocene weaker Hadley cell and gentler distribution of wet and dry (assuming this provisional picture of the Pliocene climate turns out to be right).

Pliocene: Wetter Than Today?

2011-12-30T08:52:00.000-08:00

The Pliocene is the geological period from about 5 million years ago to about 2.5 million years ago. The climate then:

The global average temperature in the mid-Pliocene (3.3 Ma–3 Ma) was 2–3 °C higher than today, global sea level 25m higher and Northern hemisphere ice sheet ephemeral before the onset of extensive glaciation over Greenland that occurred in the late Pliocene around 3 Ma.

and

Carbon dioxide concentration during the mid Pliocene has been estimated at around 400 ppmv from 13C/12C ratio in organic marine matter and stomatal density of fossilized leaves, decreasing carbon dioxide levels during late Pliocene may have contributed substantially to global cooling and the onset of northern hemisphere glaciation.

So the Pliocene is often thought of as a potential analog for the future anthropocene climate (given that we'll be hitting 400ppm in about 2015 on the current trajectory). It's the last geological era before the great ice ages and thus the last time the planet was as warm as humanity is about to make it.

However, the Pliocene was very likely wetter than the modern climate on average. My understanding is that the evidence for this comes primarily from studies of ancient vegetation - chiefly by classifying pollen in sediment cores in lakes or under the ocean. A nice synthesis of this seems to be the PRISM3 project which has produced a dataset of vegetation types around the globe. From this data I produced these maps which show the Pliocene vegetation on top and modern vegetation on the bottom:

Click for a big version in a new window. Here the key is as follows: yellow is desert, dark green is various forms of forest, pale green is various forms of grassland, scrub, or savannah, and grey is ice or tundra. There are three things that seem to be most striking about the differences:

There was far less desert in the Pliocene with most of the current deserts being grassland or savannahs.
There was more tropical forest in the Pliocene.
Temperate and boreal forests were generally pushed north with more grassland/savannah in currently temperate locations and forests where the tundra/ice is now.

It's the first two points that seem key to the idea that the Pliocene was wetter - there's no evidence of the kind of pattern of overall drying that we seem to be seeing in recent decades:

A Hypothesis about Global Drying

2011-12-29T06:11:00.000-08:00

I've been trying to understand how the PDSI seems to suggest that the land is on the whole drying out as a result of global warming (though there are regional exceptions), while in the paleo-climate, warmer periods were generally wetter, and colder periods drier (and in more modern times, for example, volcanically caused reductions in sunlight resulted in global droughts). There would appear to be a contradiction: why won't a globally warmed world be wetter, not drier?

Here is a speculation about it. Bear in mind the usual caveat that I'm not a climate scientist - just a non-specialist (albeit with a Physics PhD) trying to understand the implications for humanity.

The two temperature series shown above represent the global land temperature (on the left) and the global ocean temperature (on the right) - the figures come from the Wiki article on the instrumental temperature record. To crudely summarize, the ocean has warmed about 0.7^oC since the pre-industrial era, while the land has warmed about 1.3^oC. Thus the land has warmed 0.6^oC more than the ocean over the twentieth century. The reason for this is that as we have thickened the CO₂ blanket over the planet, and thus warmed it, the oceans and land have responded differently. The ocean, because it's a liquid which will allow convection, can transport heat into its depths much better than the land in which the heat must very slowly diffuse down through the layers of rock and soil. Thus the land has warmed more, but only to a shallow depth, while the ocean has warmed less but deeper. Since this fundamental issue will still apply as the planet gets further and further out of thermal equilibrium over the twenty-first century, we would expect the temperature gap between land and ocean to widen further and further until it is several degrees centigrade.

The global water cycle basically consists of water evaporating from the ocean, being transported to the land, falling as rain or dew, and then running off into rivers (I'm oversimplifying but that's the essence of it). So the ocean is the source of the moisture in the atmosphere and the land is a moisture sink.

The amount of moisture that air can hold is a function of temperature and is governed by a thermodynamic equation known as the Clausius Clapeyron equation. A decent approximation to this at normal temperatures and pressures is that the water holding capacity of the air increases by 7% for every 1^oC increase in temperature. If we think the amount of water in the atmosphere is basically set by the global ocean temperature, but the land is warming more than the ocean, then we would expect relative humidity to drop (on average) near the land surface - there's more moisture in the air overall (as the oceans are somewhat warmer) but not enough to keep the land as wet as it was before the temperature increase since the land has warmed more than the ocean. To a very rough approximation we might expect average relative humidity near the land to have dropped by about 7%x0.6 = 4% (percentage points) - the 0.6 being the average difference between the land temperature increase and ocean temperature increase. This is not trivial and might be expected to result in more widespread drought. If, late in the twenty-first century, the difference opened up to 3^oC then we'd expect average relative humidities near the land surface to drop by around 20% (again, percentage points - and this is 3x7 rounded since I don't pretend this is a precise calculation). That is an enormous change that we'd expect to make land dramatically drier (on average). That is broadly consistent with what the PDSI analysis of climate models seems to be saying:

Global Carbon Sink Not Degrading Yet

2011-12-27T08:05:00.000-08:00

In Friday's post, I noted that continued drying of tropical forests raises the potential that the global carbon sink might weaken in the future. This is one of a variety of such possibilities that one sees news stories about every so often (for example here and here). The background is that, as humanity has been emitting fossil fuel carbon dioxide over the last 150 years or so, not all of it stays in the atmosphere: the elevated concentrations in the air mean that the atmosphere and the ocean and land biosphere are out of equilibrium and some of the CO₂ leaves the atmosphere and goes into the ocean and biosphere each year, partially offsetting our emissions. Once out of the atmosphere it no longer affects the climate (though it may have other effects such as ocean acidification and causing ecological changes).

It's pretty easy to assess this oneself with no more than a basic memory of high school chemistry, the Mauna Loa CO₂ data, and the BP data on carbon dioxide emissions. From the Mauna Loa data we know how the concentration of CO₂ in the air changes each year and we want to convert that into a number of gigatonnes of extra carbon floating above us. To do that we need two things: to know the total mass of the atmosphere - 5.1480 x 10⁶ GT according to the Wiki - and a way to convert the volume mixing ratio of CO₂ into a fraction of that total weight that is carbon (for consistency I will just work in carbon terms - to get carbon dioxide masses just multiply by 44/12). To do this we can use the fact that the carbon atom in a CO₂molecule has an atomic mass of 12, while nitrogen (N₂ - molecular weight 28) is 78.084% of the atmosphere by volume, oxygen (O₂ - molecular weight 32) is 20.946% by volume and Argon (atomic weight 40) is 0.9340%. We can safely ignore the remaining trace components.

So we want to multiply the change in CO₂ volume concentration by 5.1480 x 10^{6 *}12/(0.78084x28 + 0.20946x32 + 0.00934*40) to get a change in the mass of carbon in the atmosphere (the denominator is basically the molecular weight of the average molecule in the atmosphere and the numerator has the atomic weight of carbon - 12 - and this is how we convert from volume terms to weights).

Alternatively, if you are willing to just trust me to get it right, here's how the change in carbon in the atmosphere stacks up against human emissions:

As you can see, the annual increase in carbon in the atmosphere is always less than what we emit and the difference is the natural sink. This is quite noisy depending on fluctuations in how well the world's plants and water bodies did in fixing carbon versus the activities of decomposing bacteria, fires, etc in releasing it back to the atmosphere again. In this graph, the symptom of the global sink starting to fail would be that the red line would start to approach or even - heaven forbid - cross the blue line. You'll see that if anything there is a bit of a tendency to the other direction in the last decade or so. To look at this more carefully we can take the sink as a fraction of emissions each year:

Here we see that the fraction of emissions that get reabsorbed by the planet each year seems to be increasing not decreasing. However, unlike some scientists I could name - I will disclose that this uptrend is not statistically significant - simple linear regression gives a trend of 2.1%/decade ± 1.9%/decade, and the result (with p=0.237) is entirely consistent with being really flat and the apparent uptrend just a fluke of the noise. But at any rate, there is certainly no evidence of the sink getting weaker.

So while we might worry about increasing drought causing runaway feedbacks in the climate in the future, there is no evidence of a weakening global carbon sink at present.

Of course, what still does have a statistically significant uptrend is the rate at which carbon increases in the atmosphere:

A regression on that red line gives an increase of 0.56 GT/decade and the p-level is miniscule (t statistic of 6) - as I mentioned the other day the concentration of CO₂ in the atmosphere is increasing quadratically (because our rate of emissions is increasing at a roughly linear rate).

Latest Palmer Drought Severity Trends

2011-12-23T06:53:00.000-08:00

Since I wrote the posts in the Future of Drought series, Aiguo Dai has come out with another paper on the subject. Mostly it's fairly incremental on the existing literature but I wanted to highlight a few interesting points (as I continue to think that this issue is the most important implication of present climate change science).

You may recall - and if not you may reread - that the Palmer Drought Severity Index is a 1960s era index constructed to try to use simple weather data - mainly temperature and precipitation - to decide if there is a drought or not. This is more complex than it might appear at first thought since - for example - a given precipitation deficit means something completely different in the winter (when temperatures are low and there is little evaporation) than in the summer. And a given deficit in precipitation minus evaporation will mean something completely different if the soil starts out saturated than if it is already dried out.

The PDSI makes use of a simple two-bucket model of how much water is in the soil and how it changes in response to temperature and moisture and then uses various normalization procedures to compare the resulting estimated soil moisture to what is normal for that particular climate. The final result is a scale which in principle runs from -10 to 10, but in which below -4 is a very severe drought and above +4 is an extremely wet period.

This index has been in use for decades in the US, long before global warming was on the radar of all but a tiny handful of scientists. However, it's quite possible to take the values for temperature and precipitation out of global climate model runs and put them into the PDSI formula, and when that is done, the unpleasant prediction is one of widespread, rapidly-worsening-to-catastrophic levels of drought in the twenty-first century.

The new paper adds to the existing literature in several ways. Firstly, there is a more systematic and widespread comparison of several modern tweaks to the original Palmer PDSI. The net-net of those is that the important conclusions about drought under global warming are qualitatively robust to the exact PDSI version used.

There is also a much larger comparison of the PDSI with stream flow. Whereas in this paper, ten large river basins were considered, now Dai is looking at 250 of the largest watersheds in the world. This allows him to make maps like the following, showing the level of correlation between the PDSI over the river basin, and annual stream flow:

Click for a large version. You can see that the PDSI does a good job in the temperate farm zones of the world (US midwest and Europe), a good job in South America, a bit less good in Siberia (where melting permafrost and lots of snow probably mess it up) and is weakest in arid areas of the world. Dai suggests that the latter is likely due to large-scale human interference in stream flow in arid areas (something the PDSI obviously does not model).

The new paper also adds a comparison with GRACE (Gravity Recovery and Climate Experiment) satellite data which measures fluctuations in the amount of ground and soil water by observing minute changes in the earth's gravitational field. The correlation with the PDSI looks as follows:

Again, the PDSI does best in the US midwest (where it was originally designed) but is a pretty useful indicator across much of the planet - again with the exception of some arid regions of north Africa, the Middle East, northern India, and Siberia. Dai suggests that systematic drawdown of ground water may be a factor here:

The correlation is low (below 0.4) and insignificant over northern Africa, northern India, parts of the Middle East, central and northern Asia, and a few other areas. Since this is a correlation at the local grid box level, we expect some areas to have lower correlations because of poor sampling of precipitation and other forcing data used for computing the PDSI. Also, continuing human withdrawal of groundwater for domestic, agricultural, and other usages in arid regions such as central North China, northern India, and the Middle East likely have affected the GRACE measurements, while it has little effect on the climate‐derived PDSI values. Tests showed that the correlation becomes positive over northern India when the GRACE data were detrended. This suggests that the GRACE data contain human‐induced variations and changes that are not considered in the climate‐driven PDSI values. Thus, low correlations should be expected over arid and other regions where such human influences are significant.

Still, overall:

I conclude that the different forms of the PDSI can all capture many of the observed variations and changes in soil moisture and streamflow during the latter half of the 20th century around the world including many cold regions, and neither the use of Penman‐Monteith PE nor the self‐calibration proposed by Wells et al. [2004] significantly improves the PDSI’s ability to capture the observed soil moisture and streamflow variations. Furthermore, the different forms of the PDSIs are similarly correlated with satellite‐observed variations in terrestrial water storage during recent years.

Finally, here is the latest global trend map in his preferred version of the PDSI:

You can see that the US is getting wetter - with the exception of parts of the Pacific coast - but most of the rest of the globe is drying out. The absolute values of the change are large - those pink-red regions are changes of 3-4 PDSI units in 50 years - implying that what was a severe drought fifty years ago is the new normal. The drying is most pronounced in Canada, the Mediterranean, Northern China, and in the world's tropical forests. If you look - the Amazon, Central Africa, India, and Indo-China are all drying out. This obviously raises concerns: the tropical forests are where most of the global carbon capture by the biosphere occurs:

Indeed, there is some evidence that global trends of increase in net primary productivity (carbon capture by plants) has been slowing and perhaps even starting to shrink as a result of increasing drought - raising the fear of a new and more serious amplifying feedback in the global climate system.

However, I remain puzzled by the lack of paleo-climatological support for this line of thinking. For example, Columbia and Venezuela do not seem to have lost tropical forest cover during the Paleocene–Eocene Thermal Maximum. Of course, the speed and nature of the current human impact on climate seems to be unprecedented in the geological record, so possibly things will work differently than in prior natural warming episodes. But I'd be more comfortable if I understood exactly why that difference was occurring.

400ppm in 2015

2011-12-22T09:02:00.000-08:00

If you thought that global carbon emissions were increasing linearly over time (roughly true) and that a constant fraction of them were retained in the atmosphere each year (also roughly true) then you would expect that the atmospheric concentration of CO₂ would increase quadratically. A quadratic fit to the annual Mauna Loa data is above and you can see that this simple brain-dead model explains 99.91% of the variation in the data from 1958 to 2010. Not often you see an R² of 99.91%. If you were willing to assume that the coupled system of planet/civilization were to continue to behave in the same way for a few more years, then we'll hit 400ppm in 2015.

If you are willing to extrapolate a few decades (admittedly a sketchier assumption) it looks like we'll be in the mid 430s by 2030:

For context, the pre-industrial concentration was about 280ppm, and I've made that the bottom of these graphs.

World Trade Partial Recovery in November

2011-12-21T04:56:00.000-08:00

You may recall that last month I developed a methodology for seasonally adjusting the monthly world trade figures from the WTO. Based on initial reports from only 20 of 70 countries for October, it seemed that world trade was dropping sharply in that month (seasonally adjusted). At this point, all but a handful of countries have reported for October and that has confirmed the initial picture as essentially valid.

However, being an impatient soul, I wanted to know what was happening in November. So I repeated the exercise with the eleven(!) out of seventy countries that are all that are available at present (representing about a quarter of global trade). Clearly this is slightly sketchier but again I rely on the fact that imports and exports are telling the same story - trade did not continue to fall in November, but instead made a partial recovery.

Overall then the current best picture is that world trade has basically gone flat in the second half of 2011 - we are currently below the May level so it's clearly not growing - but we cannot say with confidence that it is contracting at present. The world economy is hanging in suspense, waiting to see how bad things will get in Europe.

On a related note, one of the things that seemed obviously important to me in seasonally adjusting the data above was to excise the great recession before developing the seasonal factors so that they didn't end up dominated by the particular timing of that contraction. To my surprise, it seems that is something that is not routinely taken care of in seasonally adjusting a lot of official US economic data and thus a lot of it in this quarter may be a little overoptimistic because of the resulting distortions. FT Alphaville has more details and I highly recommend studying that piece and using it to upgrade your worldview filters.

Eurozone Construction Output Falling

2011-12-20T05:24:00.000-08:00

As of October. However, in fairness, that last little jog down is no bigger than similar jogs down in Jan 2010 and at the beginning of 2011 - and those proved to be transitory. So, while this is consistent with other indicators that the Eurozone is in the early stages of a new recession, it is considerably short of conclusive proof.

Kazakh Oil Production

2011-12-19T05:34:00.000-08:00

The above shows Kazakh oil production (red, left scale) and the ratio of Kazakh proved oil reserves to annual production (blue, right scale). Why do we care all of a sudden, you ask? Well:

About 50 people fought police on Saturday in the town of Shetpe, 60 miles north of Zhanaozen, where fighting first broke out. A train, cars and shops were all set alight before armed police were able to regain control.

A statement from Kazakhstan’s Prosecutor-General on Sunday suggested that police shot at the protesters.

“As the actions of the hooligans were a threat to life and safety of peaceful civilians and the policemen, the police were forced to use their weapons,” the statement said.

“According to preliminary data, the Mangistau regional hospital received 12 people with gunshot wounds, one of whom has died.”

At least 12 people have now died in fighting in western Kazakhstan which started in the town of Zhanaoz en on Friday when sacked oil workers fought police in the main square. Independent sources, though, have said that the death toll is higher.

Steve LeVine suggests thinking of the events in relationship to the Arab Spring:

A short video that has circulated, plus strong reporting primarily by RFE-RL, reveal the stuff of a tinderbox: In May, hundreds of oil workers in Zhanaozen went on strike over pay and other grievances, and many took up a peaceful vigil in the city's main square. Last weekend, Kazakhstan prepared to celebrate the 20th anniversary of independence with enormous celebrations across the country, and Zhanaozen officials set up a stage and yurts in the square. But this display in their place of protest did not sit well with the strikers.

On Friday, highly militant elements -- perhaps part of the oil strike, perhaps not -- went on a spree of violence in which they threw speakers from a stage onto the ground in the main square, set them on fire, and overturned and set a van aflame. They marched through the town, setting buildings aflame, including the mayor's office, the big local oil company and the local headquarters of Nur Otan, the ruling political party, reports Pete Leonard of the Associated Press. At some point, police opened fire. In all, 14 people died, most or all of them oil workers. Sympathy protests broke out the following day in the nearby port city of Aktau and -- far away in eastern Kazakhstan -- in the business capital of Almaty. Northwest of Zhanaozen, police again opened fire when a mob numbering about 50 set fire to a locomotive in Shetbe, and broke windows during a demonstration. One person was killed.

The government responded this way: It almost instantly shut down Twitter and Facebook across the country. In Zhanaozen itself, it blocked the Internet and telephones, then surrounded the city with a police cordon, preventing anyone from entering or leaving. Hours later, the Twitter and Facebook feeds were unblocked in most of the country. But as of this writing, Zhanaozen itself remains shut off to the world until Jan. 5 by order of Nazarbayev.

Here is the main manifestation of the Arab Spring in Kazakhstan: Not in the uprising, but the government's first line of attack -- social media, the famous channel of the Arab Spring.

Thus I wanted to look up the basic facts of Kazakh oil production:

Note that the level of production is about 1.8mbd in 2010 - a little larger than pre-crisis Libya (1.6mbd). Production has been growing rapidly for a decade. Also worthy of note is the very high R/P ratio of over 60. For comparison, the R/P in the United States for the last forty years has fluctuated between 8 and 12. Thus Kazakhstan could continue to expand production several-fold before reaching the level of maturity and depletion in the US basins.

So we are reminded again that continued western prosperity depends, via the oil markets, on the stability of all manner of far-off less-then-well-governed lands. The last thing the global economy needs now is another oil shock, but are we really to root for the government of Nursultan Nazarbayev?

Nursultan Abishevich Nazarbayev (born 6 July 1940) has served as the President of Kazakhstan since the nation's independence in 1991 from the Soviet Union. In April 2011, President Nazarbayev was reelected to another five-year term receiving 95.54 percent of the vote with 89.9 percent of registered voters participating (up from 76.8 percent in the 2005 presidential election).

Eurozone Productivity Comparison

2011-12-16T06:05:00.000-08:00

The above graph shows productivity for selected Eurozone countries since 2000. The y-axis units are euros/hr worked and the data has been adjusted for inflation and seasonality. A few observations:

As you would expect, the PIIGS countries are generally less economically productive than their northern European brethren.
Greek productivity data are not available for some reason...
Germany is not the most productive country - France, Holland, and Ireland are all higher. However, it would not surprise me to find that this is an average of West German productivity that is comparable to those countries, and East German productivity that has been recovering from a much lower level.
The Irish are now very productive and this has risen sharply since the 2008 financial crisis.
Productivity generally increases over time (as one would expect with further technological advance).
Italy is a notable exception to the trend of improving productivity - it was higher a decade ago than now. Hence the concern at the high debt level of the country - output is not growing enough to cover the interest on the debt.

I think the most critical point though is that the economic productivity of a society is a slowly changing variable. Efforts to increase competitiveness are unlikely to have large impacts on productivity in the timescale of the current financial crisis.

Here are the same data expressed as percentage change over the same quarter in the prior year:

It's noticeable that productivity growth has been slowing in 2011, just as it did in the lead-in to the 2008 recession.

Update 12/19/11: Looks like part of the increase in Irish productivity may be due to compositional effects (basically layoffs in the great recession may have been concentrated in more cyclical parts of the economy with lower productivity - as opposed to it all being due to individual sectors becoming more productive). See Krugman here.

October Industrial Production drops in Europe

2011-12-15T05:10:00.000-08:00

The latest data are above - European industrial production has been slowing all year and now appears to be dropping. Given the sharp drop in new orders in September this is perhaps not surprising and is also consistent with the declining retail trade and increasing unemployment in Europe.

The policy elite in Europe seems to be completely fixated on reducing government spending, which can only slow the economy more in the short term, further weakening the banks and weak government finances. Thus it continues to seem that Europe has to get quite a bit worse before it can get better. At this point I have a poor sense of where the bottom might be - does the ECB ultimately come to its senses and prevent default by more governments than just Greece? Or do we end up in a cycle of more credit downgrades, outright default by Italy, Portugal, and significant numbers of the highly leveraged European banks? In the latter scenario, I think the final consequences get extremely hard to see but it has to get very ugly and Europe might not ever be the same again.

In other news - Eurozone inflation stayed at the stubbornly high level of 3% in November. This is not your Grandfather's depression - in the thirties lack of aggregate demand (due to a previous debt-levered bubble in the twenties) combined with fundamentally plentiful resources to give rise to deflation at the same time that economic output was contracting. Here we have the same post-bubble lack of aggregate demand (relative to productive capacity), but it combines with important natural resource constraints to keep inflation moderate despite economic weakness. The principal resource constraints are oil, and that has created food constraints also (as policy elites rather foolishly decided to try and solve the oil problem by converting food to fuel). There are also secondary constraints in some industrial metals (some more short-term, others - copper perhaps - probably permanent).

This I think creates a certain zero-sum quality to the global economy at the moment that has not obtained for most of the last two centuries. If your economy contracts and your consumption of the key resources drops, others will expand to take up that resource usage and you may not be able to get back to that level of resource usage anytime soon - instead having to learn to get by on less of it.

November Saudi Oil Production

2011-12-14T09:43:00.000-08:00

Izabella Kaminska at the FT's Alphaville notes that the Saudi Oil Minister has been saying that Saudi Arabia produced over 10mbd of oil in November, but that international agencies don't agree:

So while Saudi Arabia’s oil minister Al-Naimi reckons as much as 10m barrels per day are being produced, the market ‘feels’ that approximately 9.6-9.75m per day are hitting the market.

The most obvious explanation for the discrepancy, says JBC Energy, is additional demand from Asia based on the fact that marginal barrels are currently flowing in from more expensive Atlantic-Basin markets.

That or the fact that something in the region of 400,000 barrels of crude per day has been directed straight into a market black hole.

(A graph of all the latest available data is above. Note particularly the still sharply climbing rig count.)

It's important to note that this kind of thing happens a lot. For example, in March there was a discrepancy of several hundred thousand barrels a day between what Mr Al-Naimi had said and what Saudi Arabia itself later reported to JODI. Then in July there was again a situation where Saudi Arabia apparently said it would produce 10mbd but fell several hundred kbd short.

So Ms Kaminska should consider the possibility that it is simply the character of Mr Al-Naimi that, even when he speaks with considerable precision, his words will not subsequently be confirmed either by international agencies or his own country's reports on their oil production.

Notwithstanding that, it is of considerable interest that Saudi production increased substantially in November despite the fact that Brent has been falling overall. I take this as a (minor) point of evidence in favor of the idea that the fall in September/October was something Saudi Aramco could not easily avoid, because they are producing at or near capacity and thus the level of production is subject to minor technical glitches in the individual oil fields, as opposed to the idea that Saudi Arabia was intentionally reducing production because prices were falling.

IEA: 90mbd of Liquid Fuel in November

2011-12-13T08:53:00.000-08:00

Both the IEA and OPEC reported big jumps in total liquid fuel supply in November: the IEA by 0.9mbd to a new high of 90mbd and OPEC by 1.35mbd to a new high for them of 89.15mb. The graph above shows the short term changes since the beginning of 2008 - the average is up sharply and easily exceeding previous highs.

This picture zooms out to the 2002-2011 timeframe and adds prices:

Prices continue to drift downward overall as supply increases and uncertainty over Europe clouds the demand picture.

Two new pictures this month. Although I continue to think that total liquid fuel is the best overall indicator available at the moment (imperfect as it is), the EIA provides a helpful breakdown into individual components: "Crude plus condensate" which is hydrocarbons that come out of the ground in a liquid form, "Natural Gas Plant Liquids (NGPLS) which is hydrocarbons larger than methane removed from the natural gas stream, "Other Liquids" which includes biofuels, coal-to-liquids, gas-to-liquids, etc, and "Refinery Processing Gains" - volume gains which occur in the refinery as heavier oils are cracked to lighter fuel products.

This chart shows that breakdown with a zero scale to give a sense of the relative magnitudes (since 1995, but only through August of this year):

If we blow this up to only show the region above 60mbd, we can get a better since of recent trends:

Production of crude plus condensate has been basically flat since 2005, and the increase in that time in total liquids is largely coming from increases in NGPLs and other liquids.

Finally, here is the chart of price versus production:

Global Food Prices 10% off Peak

2011-12-08T05:03:00.000-08:00

The UN Food and Agriculture Organization has reported on the November value for their food price index:

The FAO Food Price Index (FFPI) averaged 215 points in November 2011, marginally (1 point) down from October and 10 percent (23 points) below its February 2011 peak. Among the various commodities, a recovery of oils quotations compensated for a decline in sugar, while prices of the other commodity groups were little changed. At its current value, the FFPI is only 1 percent (2 points) above its level in November 2010.

At one level - it's good news for those of us that like to eat that food prices are declining (though not such good news for the farmers that grow the food). Still, my take looking at the graph above, is that this looks akin to other indicators such as European new industrial orders or world trade - there are signs of a fairly abrupt drop-off consistent with the beginning of a new recession (compare to the fall in the food price index in 2008). The incipient stabilization in November contradicts this story a little, however.

The timing is easier to see in this picture:

In 2008 the index starts to drop in July 2008 (the official start of recession in the US was Dec 2007 but Lehman didn't file for bankruptcy and initiate the really abrupt phase of the global crisis until Sep 2008). It then drops steadily until bottoming out in February 2009.

The current price drop-off really begins in September 2011, but has eased a bit in November. We shall have to see what December brings. If banks in Europe start failing left and right the global economy will go into reverse and this index will drop a lot further. If the European authorities can stabilize the crisis short of that, then not.

Relative Volatility of Commodity Prices

2011-12-07T06:22:00.000-08:00

This post is going to serve as much as a question mark as anything - a mostly blank space to be hopefully filled out in future. I was curious about the relative volatility of different commodity prices. I intuitively expected that oil would be uniquely volatile between the very low elasticity of demand and the geopolitical problems with supply.

The above graph shows - so far - three commodities - corn, oil (WTI) and US natural gas. In each case I am plotting the relative departure of the current month from the average of the prior twelve months as a simple but reasonable normalized measure of volatility. In essence this is some kind of measure of surprise - to the extent something happened this month that the market had not already priced in, this month's price will be very different from previous months.

You can see that commodity markets experience high levels of surprise - it's fairly common to see 50% price moves and not unknown to see 100% moves. At a first glance, the most obvious points are

The 1950s to early 1970s were uniquely calm and stable in both corn and oil
Since 1973, oil and natural gas have been somewhat more volatile than corn
However, there isn't an obvious and massive difference between NG and oil volatility

I'll try to quantify these things and add a few more commodities tomorrow. In the meantime feel free to add observations or explanations in comments.

Rate of Global Temperature Increase

2011-12-06T06:39:00.000-08:00

There's a very interesting new paper out from Grant Foster (who blogs at Open Mind) and Stefan Rahmstorf (who occasionally blogs at Real Climate). What the paper does is take five global temperature series that look like this:

And then uses statistical techniques to remove the influence of three sources of natural variation: the El-Nino oscillation, volcanic eruptions, and solar variability. After that, the adjusted series look like this:

Basically there is a clearly linear trend (the global warming signal) with a much smaller amount of noise left over that is a) fairly correlated between the different sources, and b) not very autocorrelated - ie it looks like the annual fluctuations in the weather.

I won't say too much about their analysis since it's well covered at Open Mind. What I was curious about is the extrapolation, since the data seem to cluster so tightly about a linear trend. I read off the average of the five adjusted series above and then did a simple linear least squares which gave the overall slope as 1.63 ± 0.09 C/century. This statistical error of about 5% is much much smaller than the uncertainties from climate models. Of course, the linear nature of the data is purely an empirical observation that could break down in the future (whereas the climate models attempt to capture the underlying physics of the global climate system).

In fahrenheit terms this is 2.94 ± 0.15 F/century. It's important to note that this is a global average - the rate will be lowest over the oceans and at low latitudes and higher over land and in the Arctic.

To give a feel for a different stability analysis - here's a comparison of the linear and quadratic extrapolations over the rest of the century:

Over that timeframe the uncertainty in extrapolation is dominated by the small non-linear component present in the data. Still - the uncertainty is not that large and will be rapidly reduced by another decade or two of data. So this gives us an idea of how much global warming we - and the planet we love - will have to adapt to.

It's worth adding the caveats that 90 years is a long time - if indeed solar power becomes cheaper than coal in a couple of decades time, or we manage to invent Freeman Dyson's carbon-eating trees, then the situation could be much better. On the other hand, since we are making fairly large changes in a system that we don't understand very well, there could well be thresholds in the climate system above which it starts to change much faster (eg a lot of the forests burning up and releasing their carbon into the atmosphere). Any of those kinds of things could render a straightforward extrapolation of the last thirty years pretty pointless.

October Retail Trade in Europe

2011-12-05T05:17:00.000-08:00

Was up 0.4% in October. Not enough to break the general sense of "gradual contraction" that's been going on since late in 2010 in European retail trade. Still, it's a positive number so some relief from the relentlessly negative news that's been coming out of Europe lately.

European Industrial Producer Prices

2011-12-02T05:02:00.000-08:00

Eurostat released the October data point for their industrial producer price index (PPI: an index that tries to track average prices paid for all inputs by European industrial concerns - excluding construction). As you can see it has been rising, but more slowly during the period this year that European unemployment is rising and retail trade contracting. The index excluding energy contracted very slightly in October.

PPI is not declining yet as it did in 2008. However, there is some indication that it was a lagging indicator in 2008 - the peak in the index including energy was in July, while excluding energy it peaked in September. By contrast, we discussed industrial orders the other day and that series peaked at the end of 2007 or in spring of 2008 and was in free fall between June and September when PPI was peaking:

Whether things will play out the same this time is less clear - in particular oil prices have been broadly declining in the second half of 2011 rather than rising as they were through 2007 and the first half of 2008. However, in general it makes sense that when final demand is disrupted (eg due to a credit crunch) that would show up first in orders for finished goods. Only after orders for goods currently in manufacture are fulfilled would it translate into prices for intermediate goods and eventually raw materials. That is clearly a process that could take a number of months, so perhaps it's reasonable that PPI is not falling yet, given that industrial orders have just begun to fall (and we don't know at this stage how far the latter will fall).

On the third hand, futures markets will of course do their best to anticipate what demand for producer inputs will be and will translate that into spot prices. The fact that this is not happening more strongly in the PPI is evidence that most futures market participants are not yet convinced that a significant slowdown is inevitable (just as they similarly weren't convinced in early 2008).

Goldman Sachs' Bullishness on Oil Prices

2011-12-01T06:25:00.000-08:00

Zero Hedge reports on Goldman Sachs' top ten trades for 2012, and this one caught my eye:

6. Long July 2012 ICE Brent Crude Oil futures for a target of $120/bbl (opened at $107/bbl) and a potential return of 12%, stop at $100/bbl

As the downside risk from the European debt crisis has intensified, so has the oil market’s incentive to draw down inventories ahead of the threatened global economic recession. In particular, in its attempt to price in the potential that the European debt crisis may trigger a new global economic recession, the oil market continues to set crude oil prices too low to clear the tight physical markets, leading oil inventories to reach exceptionally low levels for the time of year. In the first three quarters of 2011 (latest available data), OECD total petroleum inventories drew by 225,000 b/d more than normal. This implies that despite Brent crude oil prices, which averaged $111.50/bbl over the same time period, current demand still exceeded the available supply. We estimate that Bent crude oil prices would have needed to average $130/bbl to restrain demand in line with supply. Further, in the absence of the IEA coordinated release of 35.5 million barrels of government inventories this summer, Brent crude oil prices would likely have needed to average $140/bbl to keep demand in line with supply.

Of course, the market had ample inventory cover from 2011Q1-2011Q3, and so the market could balance by drawing inventories rather than restraining demand. However, with inventories now exceptionally tight outside of the US, and US inventories drawing rapidly, we believe that this draw on oil inventories cannot be sustained and oil demand must be restrained either through the feared sharp decline in world economic growth, or higher crude oil prices.

Consequently, while the downside risk from the European debt crisis has increased, the upside risk to oil prices has also increased as the low level of inventories and currently tight supply-demand balance is leaving the oil market exceptionally vulnerable to supply disappointments or better-than-expected demand. Interestingly, while the oil market has spent much of 2011H2 drawing parallels to 2008H2, the more relevant parallel may prove to be between 2011H2 and 2007H2, when extremely tight physical markets set the stage for crude oil prices to rise by almost 50% in 2008H1 to a record high over $145/bbl even though the US economy had fallen into recession, much as we think the European economy is doing now

I made the following graph of the days of supply in OECD private stocks (stocks divided by consumption):

The EIA data goes through July and the IEA gets us one more month. I'm struggling to see Goldman's argument that stocks are at "exceptionally low levels" relative to history. Anyone want to help out in comments?

I also note that there's a flaw in this analogy:

the more relevant parallel may prove to be between 2011H2 and 2007H2, when extremely tight physical markets set the stage for crude oil prices to rise by almost 50% in 2008H1 to a record high over $145/bbl even though the US economy had fallen into recession, much as we think the European economy is doing now.

If we look at the price history:

In 2007 H2 prices had been rising steadily all year. In 2011 they've been slowly falling since March.

Right now I find their arguments unpersuasive.

Seasonally Adjusted Global Trade is Contracting

2011-11-30T05:46:00.000-08:00

Yesterday I posted this chart of monthly global trade:

and noted that the usual fall surge of global trade was missing.

To make the point clearer I wanted to seasonally adjust the numbers which is a bit tricky both because the series is short and because there's a giant anomaly in the middle from the 2008 financial crisis. To get around this, I cut the series into two pieces - Jan 2006 to Jun 2008 and Feb 2009 to Jun 2011 (leaving the financial crisis part on the cutting room floor). I separately fit quadratics to each of those regions and used those fits to derive seasonal adjustment factors, which then look as follows:

I take the reasonable agreement between imports and exports (which were adjusted separately) as evidence that the procedure is not crazy. One can also tell a reasonable narrative about what these mean: there are surges in the fall (as merchandise for Christmas is shipped) and again in the spring as summer retail goods are shipped.

I then seasonally adjusted the original series which looks as follows:

One can see that indeed we seem to be at the onset of another downtown in world trade.

The remaining question is how deep this new downturn is going to get.

European Unemployment Rising

2011-11-30T04:44:00.000-08:00

European unemployment numbers for October are out and, probably to no-one's surprise, they are continuing to increase:

The euro area (EA17) seasonally-adjusted unemployment rate was 10.3% in October 2011, compared with 10.2% in September. It was 10.1% in October 2010. The EU27 unemployment rate was 9.8% in October 2011, compared with 9.7% in September. It was 9.6% in October 2010.

Eurostat estimates that 23.554 million men and women in the EU27, of whom 16.294 million were in the euro area, were unemployed in October 2011. Compared with September 2011, the number of persons unemployed increased by 130 000 in the EU27 and by 126 000 in the euro area. Compared with October 2010, unemployment rose by 440 000 in the EU27 and by 367 000 in the euro area.

and

Among the Member States, the lowest unemployment rates were recorded in Austria (4.1%), Luxembourg (4.7%) and the Netherlands (4.8%), and the highest in Spain (22.8%), Greece (18.3% in August 2011) and Latvia (16.2% in the second quarter of 2011).

Also, the flash estimate for Euro area inflation in November is available. It is 3% - not exactly flirting with deflation.

How is This Going to Work?

2011-11-29T06:09:00.000-08:00

From the FT today:

The auction came as Mario Monti, Italy’s new prime minister leading a caretaker government of technocrats, appointed the rest of his team, with three deputy ministers and 25 under-secretaries sworn in on Tuesday morning. Vittorio Grilli, director of the Treasury, becomes deputy minister for the economy. None of the appointees are politicians.

Mr Monti said his government was “slim and strong” and was acting out of a spirit of “national interest”. However, he still depends on the support of the main centre-right and centre-left parties in parliament – who refused to join the government – in order to pass his planned reforms and budget-cutting measures.

Emphasis mine. For all that a lot of us love to bash politicians, it seems to me that being a politician is actually a very demanding job requiring a lot of particular skills, knowledge, and personality traits (we can tell that it's a difficult job by the fact that so few of us are happy with the performance of our politicians). The effect of picking a government of non-politicians will be a government that largely lacks those skills and traits. It would seem that the predictable consequence will be a government that quickly angers the populace and lands itself in new political crises that it will be poor at managing.

I cannot conceive of a large business stating of its new executive management team "None of our team have prior business experience". Shareholders would panic and defect in droves, and rightly so. And yet somehow this is supposed to be a way to run a country?

Fall Surge in World Trade Missing

2011-11-29T05:25:00.000-08:00

The above shows global trade through September 2011 (with almost full data) and preliminarily through October 2011 (based on only 20 out of 71 countries that have reported so far). This is based on the monthly data from the WTO (and see here for more methodological detail).

This data is a bit tricky to interpret since there is clearly strong seasonality and yet it's such a short series, and with such a giant anomaly in the middle from the 2008 recession, that straightforward seasonal adjustment methods are unlikely to give good results.

Accordingly, I have marked with a green oval the August-October period in each past year to assist visual comparisons of different years. You can see that normally at this time of year there's a big surge of pre-Christmas trade, with the exception of 2008 when the financial crisis overwhelmed it.

You can also see that this surge is completely absent this year (red oval) - there is a small downturn in September/October instead. The caveat would be the preliminary/incomplete nature of the October data. However, I take the fact that imports and exports show a very similar pattern as evidence that the sample is large enough to capture the main trend at least roughly (it's almost the same set of countries reporting in both cases but since countries typically import quite different things than they export, the two measurements sample world trade in quite different ways).

I take this as more evidence consistent with the view that the world is in the early stages of a recession triggered by the European debt crisis.

Correlating US and European New Orders

2011-11-28T15:26:00.000-08:00

I noted the other day that industrial new orders in Europe appear to have gone off a cliff.

Now Tim Duy has a very important post showing the extremely strong historical correlation between European and US industrial new orders. Key graph above.

Further evidence that a severe recession in Europe is unlikely to stay on that side of the Atlantic.

OECD Projects Brief Mild Recession in Europe

2011-11-28T06:29:00.000-08:00

The OECD has an economic outlook out today:

The global economy has deteriorated significantly since our previous Economic Outlook. Advanced economies are slowing down and the euro area appears to be in a mild recession. Concerns about sovereign debt sustainability in the European monetary union are becoming increasingly widespread. Recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption if not addressed. Unemployment remains very high in many OECD economies and, ominously, long-term unemployment is becoming increasingly common. Emerging economies are still growing at a healthy pace, but their growth rates are also moderating. In these countries falls in commodity prices and the slower global growth have started to mitigate inflationary pressures. More recently, international trade growth has weakened significantly. Contrary to what was expected earlier this year, the global economy is not out of the woods.

The graph above shows the OECD's projections for economic growth in the US and Europe (to the right of the green line) in the context of data for the last few years (left of green line). As you can see, the OECD baseline scenario calls for slight contraction in Europe that will be over by Q2 of next year. That it turn will cause a small notch down in US growth but not an actual recession.

Personally, I'm significantly more bearish. The best case requires Europe to perform major surgery on its institutions while in the middle of a recession. The worst case is the Eurozone falls apart altogether. I don't see how the best case is consistent with only a mild and brief recession given the level of uncertainty that is bound to arise (indeed has already arisen). It seems to me that a disruption on the level of 2008 is a more likely outcome with multiple important institutions failing and needing to be rescued (the body count is already up to two with Dexia and MF Global).

The worst case probably looks more like the 1930s.

Still, given that official economic bureaucracies like the OECD are inevitably lagging indicators of recessions, the fact that they are now projecting a recession for Europe is confirming evidence that Europe is already in recession.

Oil Prices

2011-11-25T08:50:00.000-08:00

I wanted to catch up on oil price trends this morning (very quickly). The above graph shows both WTI and Brent prices. As I've articulated elsewhere, I believe Brent is the line to focus on as reflecting global trends while WTI is currently influenced materially by regional factors in the US midwest.

I continue to be bearish on oil prices - Europe is getting worse rapidly and now appears to be entering outright recession. It appears likely that there will be some measure of financial contagion to the US (though it's not visible in US economic numbers yet). Under these circumstances I cannot but believe that oil prices will fall at least somewhat further.

Note that this is a minority opinion. Reuters reports:

Many analysts see the chance of modest falls in oil prices if economic activity in Europe is hit hard by the euro zone debt crisis, but even the lowest forecasts are relatively high.

In the most recent Reuters oil price poll, only two of 35 analysts predicted Brent would slip below $90 per barrel next year and the average forecast was that prices would be close to where they are now, around $106 per barrel.

Goldman Sachs, the most accurate oil price forecaster over the last year, now sees Brent at $125 per barrel in 12 months.

My guess is that prices will on the whole fall until the situation in Europe has clearly bottomed out (whatever that ends up looking like). The fact that most analysts don't agree just suggests to me that the situation there is not fully priced in yet. This is not to say that there won't be rallies on the way down (eg every time European leaders come up with another half-baked attempt at a solution, markets will rally as many people want to believe that it will all be ok).

It's also true that the Saudi's are now making noises about stopping the current expansion plans again (after delaying them in response to the 2008 crisis). The suggests Saudi production may fall further as they seek to limit the downside to prices. Still, I believe Europe is now off the edge of the cliff (though just starting to look down) and I'm expecting the situation to turn into outright panic at some point and for that to get ahead of the Saudi response at least for a while.

European Industrial Orders Cliff Dive in Sep

2011-11-23T05:35:00.000-08:00

Eurostat just released figures for industrial new orders for September. The summary graph is above both for the Eurozone specifically (pink) and the whole EU (black).

In September 2011 compared with August 2011, the euro area (EA17) industrial new orders index fell by 6.4%. In August the index rose by 1.4%. In the EU27 new orders decreased by 2.3% in September 2011, after a fall of 0.3% in August. Excluding ships, railway & aerospace equipment, for which changes tend to be more volatile, industrial new orders dropped by 4.3% in the euro area and by 2.1% in the EU27.

Clearly the September number is a very weak reading and suggests that Europe may now be entering a sharp contraction in the real economy.

There have been indicators suggesting mild contraction for a while - eg retail trade. But this is the first indicator I've seen that looks like the kind of sharp non-linear contraction characteristic of an out-and-out recession. I guess there's always the possibility that October will be better. However, given the financial news flow in the last six weeks, it's hard to imagine too many European executives getting all giddy and excited in approving new projects.

Looking at the country-level internals is, if anything, even more indicative:

Germany, France, Italy, and Spain: the four biggest economies in the Eurozone all experienced big drops in industrial new orders.

European Banks in the United States

2011-11-22T07:04:00.000-08:00

This paper by Hyun Song Shing, Global Bank Glut and Loan Risk Premium, has already been flagged by Paul Krugman and Tyler Cowen a couple of days back, but with rather brief commentary. I found the paper absolutely eye-opening and wanted to alert my readers to it with more emphasis - if you hadn't already gotten this perspective somewhere else it's very important to take it on board in thinking about the world.

The graph up above shows the amount of assets (above the x-axis) and liabilities (below) of "foreign" banks with respect to different currencies. As you can see, the US dollar is far and away the most important currency for international bank holdings, with the Euro a distant second. But note the scale here - non-US banks peaked at over ten trillion in dollar-denominated assets/liabilities, and still today have around nine trillion dollars in assets/liabilities. Recall, for comparison that US GDP is currently running around $15 trillion/year. So foreign bank assets/liabilities in dollars are of the same order of magnitude as the entire US economy.

To get another sense of the scale, here is Figure 6:

This shows the total assets of US commercial banks (ie BofA, Citibank, Wells Fargo, etc) as compared to the dollar denominated assets of non-US banks. The two are of roughly equal magnitude. It's also striking that the main contraction as a result of the 2008 crisis came in the non-US banks.

The paper has various ways to try to get a sense of where the banks in question are. One way is to look at who used the Federal Reserve's emergency Term Auction Facility during the last financial crisis:

Again the US and non-US banks show up here in roughly equal proportions. It also becomes clear that "non-US" means mainly "European". Here are the top actual names:

So the picture is that there are two banking systems of roughly equal size operating in dollars - one headquartered in the US and the other headquartered in Europe.

This should make it clear why, when the US financial system started to go bad as a result of the bursting of the housing bubble, problems almost immediately started showing up in European banks.

It also strongly suggests to me that there is no such thing as a "Eurozone financial crisis". If it continues to worsen, the financial crisis in Europe is going to show up on this side of the Atlantic in no uncertain terms. For example, European banks have raised lots of capital via their US offices:

As the paper explains:

We would normally expect a negative number for the net interoffice assets of foreign banks in most countries, since the role of the branch is to bring funding from head office to operate local assets. However, the US is very special in this regard. Net interoffice assets were, indeed, negative in the 1980s and most of the 90s, but in 1999, net interoffice assets surged into positive territory and increased steeply thereafter. Rather than being a lending outpost for the parent bank, the US branches became a funding source for the parent.

In particular, a sizeable fraction of the exposure of US money market funds to banks, is to European banks:

You can see that exposure to the PIIGS has been greatly reduced, but exposure to the rest of Europe is still very substantial:

So, as long as the financial crisis has been confined to the PIIGS, the US has been only moderately affected. However, in the worst case scenario where banks of core European countries begin going under (eg if the Euro starts to come apart altogether and the individual countries are not all able to rescue their banks in the chaos) the US financial system will be immediately and dramatically affected (for example, if important money market funds "break the buck").

PIGS Inflation Continues Strong

2011-11-18T07:27:00.000-08:00

I am at an exec offsite for my employer yesterday and today and cannot blog properly. However a quick note that October inflation figures are out for the Eurozone, and the mystery of moderately strong inflation in the PIGS countries continues.

Overall, the Eurozone had 3% inflation over October 2010, with all the PIGS countries coming in near or above the average: Greece 2.9%, Spain 3%, Italy 3.4%, and Portugal 4%. Ireland continues to be the main exception at 1.5% - the only one of the troubled peripheral countries with lower inflation than Germany at 2.9%. So the idea that these peripheral countries have deeply depressed economies and will slowly disinflate their way to competitiveness doesn't seem to be working out. I continue to be mystified as to why sellers have enough leverage to increase prices here.

Across the Eurozone, transportation continues to be the strongest component at 5.8% with housing a close second at 5.1%. Inflation without unprocessed food or energy was 2.0%

US Mental Health Drug Usage

2011-11-16T06:25:00.000-08:00

A pretty interesting report from Medco just came out. It will probably surprise few of my readers to learn that a lot more Americans were on mental health drugs in 2010 than in 2001. The details are above with around a fifth of all Americans now using pharmaceutical assistance to get by. The point where we all need drugs to cope still seems to be a number of decades off, however.

This graph of antidepressant usage by age was interesting:

In particular it struck me that these levels could be high enough to have a noticeable impact on the famous "happiness smile":

Source. That is the phenomenon that if you ask people how happy they are things tend to get worse as they get older into their forties and then start getting better again. How much of this is just due to the fraction of the population that finally got their meds right? (A search of that last linked paper for "antidepressant" or "medication" turns up nothing).

Saudi Oil Production Declining

2011-11-15T06:43:00.000-08:00

Saudi oil production has been declining modestly for the last 2-3 months (depending on your preferred data source) while the oil rig count in country has continued to increase. See above graph (the black line is the average of five sources of production information on the left scale, while the red curve in the lower part of the graph is the Baker Hughes rig count on the right scale).

For readers that don't follow every twist and turn of Saudi oil statistics let me sketch the back story since 2005. In about 2005 when global oil supply appeared to plateau, Saudi Arabia also had appeared to plateau at around 9.5mbd. At that time the rig count, having been stable for years, began to rise as Saudi Arabia launched a series of large megaprojects to expand production capacity (or replace oilfields that were in decline depending on your point of view). Then in 2006, production began to mysteriously decline despite high oil prices (provoking a great deal of debate in the energy blogosphere as to whether this was a voluntary move to further increase prices, or an involuntary one due to underinvestment and/or declines in some of their fields). Regardless, in mid 2007, production began to gradually increase again until by mid 2008 it had reached the previous plateau level of 9.5mbd.

With the financial crisis of 2008, oil prices dropped below $40/barrel and the Saudis, in co-ordination with other OPEC countries, made a moderate but sharp cut in production down to about 8mbd to protect prices. Then in 2009 and more so in 2010 they began to gradually increase production as the global economy improved and prices got higher. This culminated in a brief hiatus just below 9mbd around January 2011.

Indeed as the world lost Libyan production in January/February of this year, Saudia Arabia initially did nothing. However, a few months later there was an agreement with the IEA such that the OECD countries would release oil from government strategic reserves for 30 days while the Saudis ramped up to a level of 10mbd. Saudi Arabia did then increase oil production sharply in June to a peak of around 9.7 mbd or 9.8mbd - not quite achieving the promised 10mbd.

They have not then gone on either to increase up to 10mbd or to maintain production at the peak level, but rather have eased back to about 9.5mbd.

So are we any the wiser as to the great question of whether Saudi Arabia has significant spare capacity and could increase production to 12mbd or more if only they chose? Only slightly I fear. I interpret the fact that the Saudi's couldn't quite meet the 10mbd promise and almost immediately backed off that, despite amply high prices, as consistent with the story that the recent Saudi production expansions have only gone to offset declines elsewhere (perhaps especially in north Ghawar). The increasing rig count also suggests a lack of comfort with the amount of spare capacity presently available.

However, I can see that someone who thought the Saudis were able to produce more but are profit maximizers who intend to keep prices as high as possible consistent with not actually throwing the world economy into recession might also be able to tell a story about how the Saudis did the bare minimum to moderate prices after it became clear that the Libya price spike was causing global economic harm but then began gradually lowering production as prices slowly began to fall following the price spike, keeping the world in a state of slow growth, but some growth, while maximizing the Saudi take for its oil. The one weak point in this story is that it offers no explanation for the rising rig count.

Of course - at this point maybe the difference between the two views doesn't actually matter that much - either the Saudi's can't produce more or they won't, but either way the effect is to keep oil prices high enough to be a significant constraint on a world economy that is already struggling.

Size of the US Underground Economy

2011-11-14T05:44:00.000-08:00

Sharon Astyk had a thought provoking post last week:

Here is the single biggest question to consider about the economic, energy and environmental unwinding we are facing - what will the economy look as we go? I get more questions about this than about anything else - what should people do for work, what should they do with savings, how should they begin to prepare themselves for a lower energy world. What I find, however, is that among both the prepared and the unprepared, there's a whole lot of people kidding themselves. There are those who imagine that there is no economy outside the world of the stock market and formal jobs - that a crash in those things is the end of the world, which means to them either that it can't happen or they should buy a bunker and some ammo. Others have imagined themselves "free' of all economic structures larger than the neighborhood, cheerfully providing most of their needs or bartering and never again touching cash. Both ideas fall into the realm of fantasy.

Let us remind ourselves that the informal economy is, in fact, the larger part of the world's total economy. When you add in the domestic and household economy of the world's households, the subsistence economy, the barter economy, the volunteer economy, the "under the table" economy, the criminal economy and a few other smaller players, you get something that adds up to 3/4 of the world's total economic activity. The formal economy - the territory of professional and paid work, of tax statements and GDP - is only 1/4 of the world's total economic activity.

We know from peasant economist Teodor Shanin and others working in the field that when the formal economy fails people all over the world, they shift into the informal economy. This explains why, in the former Soviet Union, although conventional economic models showed that people "should" be starving to death, they weren't. This is how people with functionally no income can still eat - although often not well.

I frequently disagree with Sharon, but I do find some points of agreement on this question of the informal economy. My sense of the likeliest evolution of society in coming decades is that global economic capitalism will persist but that it become more efficient by continuing to become more automated. Thus it will be able to serve the interests of economic and cultural elites while requiring fewer resources (particularly oil) because it will increasingly not require the services of, or serve the interests of, the masses. I've written on a number of occasions of how I think one of the earliest symptoms of the gradual approach of the "singularity" is the continued lowering of the US male employment/population ratio:

Levels are particularly low amongst the young:

and the less educated

I would expect that the increasing lack of need for many classes of men in US society would be associated with an increase in the size of the underground economy: drug production and dealing, crime, casual cash labor, off-the-books construction projects, etc. I would also expect that the size of the informal economy would continue to grow further as the US experiences more globalization, more immigration, more automation, and less access to oil and other resources.

I was curious to know what efforts had been made to estimate the size of the informal economy. After some poking around, I discovered Edgar Feige, a widely cited Professor Emeritus of Economics at University of Wisconsin-Madison who seems to have devoted much of his career to this question. His latest estimates are in this paper, and here's the bottom line:

This shows two estimates of the size of the underground economy estimated as the ratio of all unreported income to reported income. Note that the graph is not zero-scaled. This indicates that the underground economy more than doubled in size during WWII (in response to rationing), fell during the rapidly growing years of the fifties and sixties, increased sharply in the seventies with the oil shocks, improved a bit in the eighties and nineties, but then has started to reach new heights in the difficult years of the aughties. This is more-or-less what I would have expected. I predict that these ratios will continue to go higher in future years.

It's worth noting that there are considerable (and rather fascinating) measurement issues that have to be overcome to produce these estimates and the results should be viewed as somewhat uncertain. Some sense of the issues can be gained from these quotes from the paper:

One of the most reliable economic statistics is the amount of U.S. currency in circulation held outside of depository intuitions by the public. By the end of 2010, U.S. currency in circulation with the public had risen to $920 billion dollars, amounting to $2950 for every man, woman and child in the country. Over the past decades we have witnessed a host of cash-saving financial innovations, leading to widespread predictions of the advent of a “cashless society”. But contrary to these expectations, the demand for U.S. dollars continues to rise and we remain awash in cash. Over the last twenty years, real per capita currency holdings increased by 79 percent and currency as a fraction of the M1 money supply rose from 30 percent to 49 percent.

To put these figures in perspective, they imply that the average American's bulging wallet holds 91 pieces of U.S. paper currency, consisting of: 31 one dollar bills; 7 fives; 5 tens; 21 twenties; 4 fifties and 23 one hundred dollar bills. Few of us will recognize ourselves as “average” citizens. Clearly, these amounts of currency are not normally necessary for those of us simply wishing to make payments when neither credit/debit cards nor checks are accepted or convenient to use.

Federal Reserve surveys (Avery et al. 1986, 1987) of household currency usage found that U.S. residents admitted to holding less than 10 percent of the nation's currency supply. Businesses (Anderson, 1977; Sumner, 1990) admitted to holding 5 percent. It seems that the whereabouts of roughly 85 percent of the nation's currency supply is unknown. This anomalous finding suggests that the “currency enigma” (Feige 1989, 1994) and the problem of “missing currency” (Sprenkel, 1993) is still very much with us.

The currency enigma has both a stock and a flow dimension. First we must determine who holds the outstanding stock of U.S. cash. Specifically, how much of this currency is abroad, (the dollarization hypothesis) and how much is held domestically (the underground economy hypothesis) by citizens reluctant to admit to their true cash holdings? The flow issue concerns the amount of cash payments sustained by that missing currency. If half of the missing currency is hoarded and the other half is used as a medium of exchange, turning over at an average velocity of between 30 and 50 transactions per year, (Feige, 1989a) the missing circulating currency stock would give rise to a flow of “missing payments” of an order of magnitude comparable to the entire GNP of the United States.

In essence it's first necessary to produce estimates of what fraction of the unknown currency is actually overseas, and then it's necessary to estimate how fast the domestic underground cash is turning over in order to get to estimates of the amount of underground income.

The entire paper is well worth a read.

Global Liquids Production reaching New Heights in October

2011-11-10T05:47:00.000-08:00

Still not peak oil (or at least not peak liquid fuels). With the IEA and OPEC both reporting through October (and the EIA through July) it seems reasonably likely that October has pipped the pre-Libya heights of January.

On the longer time frame, this is the biggest bump on the bumpy plateau that's been going on since 2005:

My best guess going forward is that the European situation is going to worsen further and cause a global slowdown that will lead to at least 1-2 mbd drop in production (and a corresponding drop in Brent price down somewhere below $80 in order to get oil producers to cut back in line with demand). Timing is hard to call, but the pace of degradation in Europe does seem to be accelerating. The impacts on the real economy there have so far been modest but I expect that to change.

OPEC Says Oil Production Up in Oct (Sort Of)

2011-11-09T04:59:00.000-08:00

The OPEC monthly report is out and says that

Preliminary figures indicate that global oil supply increased 0.87 mb/d in October to
average 88.35 mb/d. Non-OPEC supply experienced growth of 0.86 mb/d, while OPEC
crude production remained relatively flat.

However, it's worth noting that last month they said

Preliminary figures show that global oil supply averaged 88.50 mb/d in September, a
gain of 0.76 mb/d from the previous month, supported by estimated increases in non-OPEC supply.

So in other words although they now show production increasing from September to October, they revised down September by more than the inter-month gain, thus coming up with a final number that is a little less than last month's number.

Still I suppose we'd have to say that global oil production still seems to be on an uptrend. The IEA will report tomorrow, so we can potentially revise our opinions then.

European Oil Consumption

2011-11-08T05:04:00.000-08:00

The above graph shows OECD Europe oil consumption, monthly, from 1995 through June of this year. (The data are from the EIA - Eurostat only has annual data through 2009). There is a clear seasonal signal with consumption apt to peak each year in the late autumn and be in a trough in the spring.

You can also see that consumption peaked in 2006 and has fallen about 10% since then (similar to the fall in US consumption). There was a small recovery in 2010, but consumption was down further again in the first half of 2011. It's hard to see how the data could have rebounded in the second half given the ongoing financial crisis in the Eurozone but we'll have to wait a few months to know for sure.

European Shoppers Still in Funk

2011-11-07T07:21:00.000-08:00

As of September anyway, but it's hard to imagine that news since has improved the mood.

The contraction in 2011 is rather gentle - considerably more so than in 2008 - but it's still unambiguously a contraction.

In other business, Italian government debt is now considerably cheaper than it was before the ECB began its intervention:

The European financial crisis has not stabilized yet and I expect further tears in the fabric of expectations before things can be patched together into a more permanent arrangement.

A Little More on US Consumption

2011-11-04T04:36:00.000-07:00

The above graphs shows the weekly US oil consumption estimates from the EIA (blue - left scale), along with a 13 week centered moving average (red). This data is not zero-scaled to better show changes. The green line is oil prices (Brent - on the right scale). I have put vertical gridlines in for quarters as well as years.

If we look at the 2011 data, you can see that in the first half of the year the pattern was pretty much that oil prices were rising and consumption was falling (primarily as a result of the Arab Spring and the Libyan revolution). However, the last four months are a little harder to interpret. Clearly prices have been falling - if slowly - amidst the beginnings of economic contraction in Europe and fears over a wider financial crisis (with an assist from the debt limit debacle in the US).

The consumption trend in H2 is harder to call - you could say "roughly flat with some noise" - suggesting that the slowly falling prices have been enough to abate the drop in consumption. Alternatively, you could say it first went up at the end of Q2 and beginning of Q3 and then has been dropping in late Q3 and early Q4 (suggesting renewed economic weakness). I'm inclined to favor the first explanation but it's hard to say for sure.

The implication is for the level of oil prices. I have a rough rule of thumb that if US oil consumption is rising or even flat, then prices are below their long term future average: stagnant global production and rising consumption in Asia and the Middle East imply that US consumption must drop in the future. So depending on whether you interpret the drop in consumption in the last couple of months as noise or signal, oil prices are either too low, or not. I guess we'll have to come back to the question in a month or two.

(I should add - whether or not oil prices are below their long-term average now, there's certainly considerable potential for them to drop further depending on how much worse the European-centered debt problems get).

Google Reader Disaster

2011-11-02T09:03:00.000-07:00

Count me with Tyler Cowen, Bruce Bartlett, and Brad DeLong - the new Google Reader is an absolute disaster. Details here. This has certainly soured me on the whole cloud/software-as-a-service thing. One morning the provider just ups and decides to upgrade me to something much worse than what I had before. I get no notice, no choice, and no recourse. What on earth where they thinking?

Update: Hallelujah: a solution! (h/t Paul Kedrosky)

US Oil Consumption

2011-11-02T05:33:00.000-07:00

It's been a while since we've checked in on US oil consumption. The above graph shows the EIA's data since 2000 - both the weekly and the monthly series. The monthly series is believed to be more accurate, but the weekly series is more up to date - going through the week before last, versus August for the monthly series.

In any cases, both series tell more-or-less the same story: after growing in the recovery following the great recession, US consumption is generally declining in 2011 in the face of a weak economy and fairly high oil prices.

Seven Billion: The Graph

2011-11-01T05:35:00.000-07:00

According to the UN, yesterday the planetary human population crossed the seven billion mark. The New York Times notes that there's some carping among the demographers as to the exact date but it hardly matters. There's a six month or so window of uncertainty, but we might as well pick a date to do a little collective reflection on the meaning of seven billion, and now will serve quite well.

The above shows estimates of global population from the time of Christ on: data are from the UN after 1950 and via Brad deLong before that. I like to look at it on this longer timescale as it makes it clear what an extraordinary event we are living through. The steepness of the wall in the second half of the twentieth century shows it graphically. Since I was born in 1965 the global population has more than doubled, and it could easily add as many people again before I die. It's an extraordinary thing for a population to have a doubling time markedly less than the lifetime of an individual member. Throughout the pre-industrial era the doubling time was many times longer than that, and indeed the population frequently shrank (for example, in the Dark Ages, and following the Black Death).

As to how it ends: who knows? Here is the range of official scenarios from the UN:

European Unemployment Up

2011-10-31T03:54:00.000-07:00

European unemployment numbers came out for September, and it's pretty clear that things are getting worse - starting to look like a renewed recession in Europe. Hardly surprising with all the financial turmoil, I suppose.

The country-level rates look as follows:

Spain and Greece are worst, followed by some of the Eastern European countries and Ireland.

Also, the early estimate for inflation in October was 3% so that's not particularly low.

European Savings Rates

2011-10-28T07:02:00.000-07:00

Eurostat just released savings rate data for Q2 of 2011. The graph is above since 2000. It looks like savings rates have started to increase a little again - this would be consistent with the slowdown in Eurepean retail sales that began late last year, and presumably reflects European households feeling more cautious about the economic situation (but not catastrophically so at this point).

The latest agreement seems like it has successfully kicked the can down the road again, while failing to really solve the problem:

However, this non-solution is closer what is required than the last non-solution. No doubt we'll be back watching the same kind of spectacle again in a month or two. I guess when political and economic realities collide in this way, it may only be through a series of crises that the two can be reconciled. It's nerve-wracking to have the global financial system constantly at risk of collapse if politicians make a mis-step, but I guess we will have to get used to it.

European Art Blogging

2011-10-27T05:06:00.000-07:00

Following up on Saturday's point that Russia was a particularly poor pre-industrial society, I had the opportunity yesterday to go round the National Gallery in Washington D.C. quickly, which has many paintings drawn from about 800 years of European art. There are remarkably few that show scenes of every day life with ordinary people: the first few hundred years are almost exclusively religious art, and after that the dominant form is portraits of rich people. However, I picked a few that seemed illustrative from the 1600s in the Netherlands and France. At that time, the Netherlands was the wealthiest European society with France perhaps in third or fourth place behind England and Spain. So between these and the Russian paintings we can get a sense of the full range of the standard of living of ordinary people in pre-industrial agrarian societies.

The picture at top is "A View on a High Road" by Meinart Hobbema from 1665, and is perhaps the most directly comparable to the view of the Russian village from Saturday's post. The low quality of the roads is pretty similar but the houses are rather better (though still very small and in very ill repair by modern standards).

Next is "Workmen Before an Inn" by Isack von Ostade from 1645:

This was commerce 17th century style. And then from France we have "A French Interior" by Louis Le Nain, also from 1645:

Finally, here is the one of the two main energy sources for industrial manufacture:

The other being water-wheels. That last painting is "The Mill", 1648 by Rembrandt.

Eurozone versus US Debt

2011-10-26T06:01:00.000-07:00

Eurostat a couple of days ago released 2010 data for government debt and deficits. Above I contrast the total Eurozone gross debt with that of the US (US data from the IMF) as a fraction of their respective GDPs. It's interesting to note that the US debt is higher than Eurozone debt, and the US has overall acted in a more stimulative manner in response to the 2008 crisis than has the Eurozone.

This makes it clear that the present crisis in Europe is not a function of the overall level of the debt across the entire Eurozone but rather of inadequate institutional arrangements for coping with the way it is distributed.

It doesn't sound like the next summit meeting is likely to have a big impact on the problem:

New fissures and disagreements emerged on Tuesday on the eve of a European Union summit meeting promoted as the moment for agreement on a comprehensive solution to the two-year-old euro crisis. Crucial financial measures were left unresolved, and Prime Minister Silvio Berlusconi of Italy faced strong opposition inside his governing coalition to major changes demanded by the Europeans.

and

From all appearances this week, this could be another disappointment, an agreement on a general plan but without many specifics, and probably without the massive “wall of money” to protect vulnerable Italy and Spain that the markets have demanded.

In addition, a meeting of European Union finance ministers, set for Wednesday before the summit meeting, was abruptly canceled on Tuesday, largely because of continuing negotiations with banks over a reduction in the face value of Greek debt — a so-called haircut — of up to 60 percent instead of the 21 percent previously agreed to but considered grossly inadequate by most economists.

The Europeans want the banks to agree to the losses voluntarily, to avoid a formal default that would incite unpredictable events. But the banks have negotiating capital, too, and are stretching out the talks. At the same time, officials in Brussels said, it was difficult to sign off on bank recapitalization — considered pretty much a done deal — until they were clear about the real value of the Greek debt in the banks’ portfolios.

The Europeans also want Mr. Berlusconi to live up to his promises to do more to reduce Italy’s huge accumulated debt — about $2.65 trillion euros, or 120 percent of gross domestic product, among the highest in the developed world — and to promote economic growth in a largely stagnant economy. While Italy’s annual deficit is modest, the debt overhang means that speculation is driving up the cost of financing that debt, which if unchecked, could tear holes in the budget.

My view is that since the present level of crisis is not enough to drive eurozone politicians into an adequate solution, the crisis will have to worsen first. Since it seems unlikely to get better by itself (with growth slowing and Italian interest rates rising) it seems likely that at some point European leaders will be staring into the abyss. At that point they will most likely finally come up with some adequate set of arrangements (most likely by finding a way to allow the ECB to finance government debt on a larger scale). If that proves impossible then I suppose there's likely to be a massive financial crisis as multiple banks fail - given that that is in no-one's interest, I expect a solution to be found.

So my view is still "it has to get worse before it can get better".

Italian Interest Rates

2011-10-24T05:34:00.000-07:00

Loss of confidence in Italian debt seems to be slowly worsening - the above shows the yield on the ten year bond from Bloomberg. Note that the graph is not zero-scaled. The spike in July was caused by a squabble between Prime Minister Burlusconi and Finance Minister Tremonti. It ended when the ECB intervened, but now interest rates have risen almost to the peak level notwithstanding continued ECB involvement.

A reminder on some of the background. Italy has the third largest government debt market in the world (after the US and Japan). This is due to its high level of debt/gdp:

Note that the Italian government was slowly working the debt down in the late nineties and early 2000s, but then it increased since the 2008 crisis and that has been enough to cause the present loss of confidence. To me this is an object lesson in why countries shouldn't run at too high a level of public debt - the world is a dangerous place and you never know when some crisis might come along and force your debt over the threshold of what markets will tolerate. Obviously it's a particular problem when you don't have your own central bank.

It's also a problem when the economy is barely growing:

As further cuts in the budget are required, it's hard to see how rapid growth can begin now.

The Peredvizhniki

2011-10-22T10:26:00.000-07:00

I have been in Stockholm for a business trip the last couple of days (hence no blogging). This afternoon I visited the Swedish National Museum which is having an exhibition on the Peredvizhniki - a society of Russian painters which formed in reaction to the conservative tastes of the St Petersburg Imperial Academy of Art in the late nineteenth century. The academy's announcement in 1863 that the annual gold medal contest would have the subject "The Banquet of the Gods in Valhalla" provoked a rebellion: the artists wanted to paint real scenes of life from Russia, not Viking mythology.

This led to several decades of movement that was devoted to trying to paint the realities of Tsarist Russia. The exhibition here I found deeply moving - these are big heroic-scale paintings - often six or ten feet tall - but focussed on the lives of very poor peasants. Apparently the paintings are not well known in the west (but deserve to be!). Clearly the artists were leading the way here - as they so often do. Fifty years later, the society had reached the point where the Tsars were overthrown in a bloody revolution but I imagine young artists starting to tell the truth about the old order was one of the first bricks pulled out of the wall.

I took photos of a couple of paintings that relate in some way to the themes of this blog. Both are poor substitutes for the grand scale of the originals. Above is "Barge-Haulers on the Volga" by Ilya Repin from 1870-1873. It's hard to think of a more graphic illustration of the benefits of modern energy sources: this is what it takes to move even a fairly modest-sized boat without them (Repin visited the Volga region to study the haulers before painting the work so presumably it's fairly true to life). To me, this painting is suffused with political consciousness: the artist does not think that human beings should live this way and intends to express it passionately and directly to the viewer. It's the first painting when you enter the exhibition, it's really big and really well done, and I was completely blown away by it.

Next is one for my romantic agrarian friends (I'm looking at you Sharon Astyk :-) This is a nineteenth century Russian farming village:

This is Pyotr Sukhodolsky - Midday in the Countryside:

Sukhodolsky's fascinating work is typical of the growing sense of realism in the 1860s - an authentic view of a scruffy Russian village with its dilapidated buildings and dirt tracks. The foreground, where academic tradition lead the eye to something worthy of contemplation, focuses on a rusting harrow and a sleeping sow having fleas pecked from its hide by a magpie.

Local food taken to its logical conclusion! Admittedly, Russia was the poorest of the pre-industrial European societies. At an earlier time when England and the Netherlands could support 20-30% of the population in cities, Russia had only 5% - indicating that it's agriculture generated very little surplus beyond the bare minimum required to support the peasants - and not in style, as the painting documents.

I realize few of my readers are in a position to visit the paintings in Stockholm, and probably even fewer after they return to their homes in Russia - but if you can, it's well worth it.

Peak Oil for Economists

2011-10-19T12:51:00.000-07:00

A few quick thoughts on Jim Hamilton's new magnum opus. The paper is essentially a summation of Jim's current thinking on the evidence that peak oil is near enough to care about and that it's likely to be quite economically disruptive. It is thoroughly researched, superbly argued, and very clearly written, as one would expect from this author. I hope and expect that it will be quite influential in getting economists to take the whole subject more seriously.

In terms of the content, long-time readers of mine will probably find a limited amount they didn't already know and little to disagree with. Six years ago, when I first began exploring and blogging about peak oil, Jim and I had some spirited debates on his blog as well as at The Oil Drum (see here for a flavor). However, I like to think that we are both empirical and pragmatic and six years of additional data have been enough to cause our views to increasingly converge.

The one thing that I think is sad (though perhaps understandable) is that one will search the references in vain for names like Hubbert, Campbell, Laherrere, Hirsch, Hall, etc. The argument is couched completely without reference to the line of thinkers about peak oil that stretches back over the last fifty years. Given the enormous walls of incredibility that prevent diffusion of thought between academic disciplines, that is arguably necessary to make a persuasive case to macroeconomists. However, from the standpoint of giving intellectual credit where it is due, it's unfortunate that it's not possible to recognize that a number of thinkers had earlier come to quite similar conclusions using their own methods (even where one might disagree with aspects of those methods - disagreements one is free to note).

Housing Inflation in the Euro Periphery

2011-10-19T06:06:00.000-07:00

Yesterday I noted the rather mysterious phenomenon that inflation appears to be running higher in the Eurozone periphery than in the core. Several commenters suggested that perhaps this was due to tax changes. In order to explore the issue further, I went to this page which gives details of the "HICP" (Harmonized Index of Consumer Prices - essentially the European equivalent of the CPI) for various subcategories of goods and services. I looked through them all to find cases where inflation is higher in Greece and Spain than in Germany. It quickly became clear that this is not a general pattern across all categories, but rather is concentrated in Housing, and to a lesser extent transportation.

The graph above shows inflation in housing over the last 12 months for a number of Eurozone countries, and Greece, Spain, Italy, and Portugal are all higher than Germany. This next graph shows the last 12 months worth of year-on-year changes for just Germany, Greece, and Spain:

It appears that housing has been under price pressure in Greece and Spain for a couple of years. The housing HICP in Europe excludes owner-occupied housing (as clear from these documents), so this is basically indicating that rental housing is the main source of the recent peripheral inflation.

Why this should be so is still unclear to me. A quick Google search tends to exclude the tax idea. Possibilities that occur to me are that many former property owners have been forced into the rental market, or immigration. However, this wouldn't explain the timing structure of the graph: the highest inflation being over the 12 months ending this spring. Adding a few more countries reveals this is somewhat Europe-wide except perhaps for Italy where it's later:

And that leads me to this speculation - could the high level of interest rates in the periphery be feeding through into rents and driving up measured inflation?

That's all I have time for today but hopefully I can explore this further tomorrow.

Strange Price Trends in the Eurozone

2011-10-18T05:48:00.000-07:00

Eurostat came out with preliminary inflation numbers for September: at 3% year over year, it's not exactly flirting with deflation. Even the number excluding food and energy is 1.6%: lower, certainly, but not imminently threatening to become negative either. But what really caught my eye was some of the nation-level stats, which caused me to make the following chart of the overall price level for the PIIGS countries, as well as for three "core" countries: Germany, France, and the Netherlands.

So the conventional account of the Eurozone's woes, or at least conventional in the US econoblogosphere, goes as follows. As a result of the common currency, peripheral countries that used to have high interest rates gained much lower interest rates. This attracted big capital inflows in the nineties and aughties and caused property booms and ultimately housing bubbles in those countries. As a result, their economies overheated and their costs grew out of line with Germany/France/etc (at least relative to productivity). In 2008 the housing bubbles were all burst, and now the peripheral countries have depressed economies. What they really need to do is devalue their currencies (to restore competitiveness) but they can't because of the common currency. Instead, they need to go through a long and painful period of internal devaluation to bring costs back in line with where they should be. This will be accomplished by the depressed state of their economies causing wage/price levels to sag relative to the core countries. Also, in this account of things, the ECB has been unhelpful by raising rates too high (in order to prevent inflation in Germany and France), while letting the poor peripheral countries go to the dogs of internal deflation.

I've seen more-or-less this account from across the political spectrum - from Paul Krugman rightward at least as far as Megan McArdle.

However, if that picture of what is happening were fully accurate, we would expect to see the PIIGS countries at the bottom of the chart, with inflation below the Eurozone average (the heavy black line), while the core countries would be a bit above the average. But that's not what we see at all - instead Greece and Spain are at the top of the chart and France, Germany, and the Netherlands, are all below the average. Only Ireland appears to be behaving in the expected manner.

You might object that the chart above, which uses Eurostat's 2005 basing for the price levels, mixes pre- and post-bust data and is thus confusing the issue. To assess this I rebased all the numbers on July 2008 = 100 and redrew the graph since then:

The trend is a little less pronounced but it's still basically the same deal: with the marked exception of Ireland, the peripheral countries have higher inflation than the core countries.

Why is that?

Monthly Charts with Brent vs WTI

2011-10-17T05:40:00.000-07:00

Pursuant to Friday's decision to use Brent prices henceforth, I wanted to take the standard graphs of oil supply that I post each month - at least the ones that incorporate price information - and post versions of them with each price series to better understand the shift that I am making. Above is the graph of production since 2002 with inflation-adjusted Brent prices on the right hand scale and below is the same thing with WTI prices:

As you can see, the main difference is that the price peak associated with the Arab Spring is bigger in Brent terms, and has not fallen as far since. This reflects the widening WTI-Brent spread over the last 12 months.

Similarly, here is the new Brent-based price production scatter-plot:

And here is the old one based on WTI:

Again, the big difference is that the 2010-2011 price spike looks more like the 2005-2008 one when viewed in Brent terms.

Henceforth, I will be using only the Brent-based ones.

Short Note on the Arab Spring Price Spike

2011-10-14T13:29:00.000-07:00

I was having a little email discussion with Kevin Drum and Jim Hamilton about sources for monthly oil prices, and that led me to make the above graph. It shows WTI (from Fred) and Brent prices (from the EIA), corrected for inflation using the CPI-less-energy (from the BLS).

The point that struck me was that the Arab Spring/Libya price spike this year actually hit a higher level in real terms than the 1980 (Iranian revolution) price spike. There's perhaps a tendency to see it as a minor affair since prices didn't reach the level of 2008 (particularly in WTI terms, which we should probably ignore recently), but it really is up there in the pantheon of big oil shocks.

Brent is a Better Reference Price than WTI

2011-10-14T05:56:00.000-07:00

During the discussion of Brent vs WTI following my latest monthly global oil supply post, commenters raised a couple of questions: how did Brent or WTI contrast with the prices received by the swing producer (Saudi Arabia), and how did they contrast with US gas prices?

The answers are reasonably clear in both cases. Above, I show the price of Saudi Arabian Light grade from the beginning of 2000 (on the y-axis) versus either Brent or WTI on the x-axis. Historically, Arab Light has always sold at a slight and only moderately variable discount to Brent/WTI (because Arab Light is more sour). The black line above represents exactly equal prices. However, in recent months, the historical relationship with WTI has completely broken down and Arab Light is selling for much more than WTI. The relationship to Brent is unchanged.

Similarly if we look at the average weekly retail price of US gasoline versus WTI (top panel) and Brent (lower panel):

you can see that the correlation with Brent is a bit tighter and in particular the current anomaly in the WTI graph where gas prices are too high relative to WTI (the "loose end of the string" at about ($80, $3.50)) is non-existent in the Brent graph where current prices are pretty much normal.

One could do a more thorough analysis looking at all oil blends around the globe but the data above is enough to convince me: WTI is now reflecting an anomalous situation in the US midwest and no longer even explains US gas prices well, let alone global trends. Therefore I will redo all my monthly supply graphs using Brent as the marker and henceforth use mainly Brent in analysis.

Slightly Optimistic European Stats

2011-10-13T04:58:00.000-07:00

The stats on industrial production in Europe that just came out for August are a little ray of sunshine in what has been generally a gloomy picture on that continent. The numbers are above and you can see that the last data point is sharply up. Industrial production is up 5.3% year-on-year in the Eurozone (though not yet back to the pre-recession level).

Furthermore, some of the nation level internals are encouraging too. Some of the strongest numbers are coming from peripheral countries:

In terms of sector, capital goods did best, with consumer durables doing poorly (consistent with the fact that European retail trade has been declining):

Obviously there's quite a bit of noise here month-to-month and not too much should be read into one good month. Europe is going to need institutional change to work its way out of its crisis. However, given that one of the major fears in the Eurozone is that the peripheral economies will be depressed by austerity measures and tight money from the ECB, making their debt burdens yet harder to bear, it's nice to see these strong numbers in Italy, Portugal, and Ireland.

September Oil Production

2011-10-12T06:03:00.000-07:00

The two agencies that report earliest, OPEC and the IEA, are out with their estimates of total liquid fuel production in September. The IEA says it went down a little and OPEC says it went up a bit more than the IEA says down. So the average is up, but I'm not sure you should rely too heavily on that fact just yet. We'll see what subsequent months bring with both revisions to this data point and further data points. In any case, the data since 2008 are above, and since 2002, along with WTI spot prices, are here:

The price/production curve continues more or less in the same band:

I'm wondering about switching these graphs to be based on Brent rather than WTI prices, given the huge spreads between the two these days, and thinking that Brent is a better indicator of global prices - thoughts?

Peak Supermajor was in 2005?

2011-10-11T06:22:00.000-07:00

Yesterday I posted production charts for three of the big IOCs. Today I add the other three supermajors (Shell, ConocoPhillips, and Total). The aggregate production for all six is shown above. Note that this is all liquids - ie it includes natural gas liquids and syncrude from tar sands in addition to regular crude oil.

As you can see the supermajors as a group have not grown over the last decade and indeed show something of a peak in 2004-2005 from which they have since declined. Here are the individual lines (which in some cases go back further):

Commenter bmerson asked:

What are the possible explanations for that? 1) Peak oil plateau - within the areas available to the IOC's, the geology simply will not support higher extraction rates. 2) Over-regulation - they are not being allowed to drill in places that could support higher extraction rates. 3) Under-investment - the IOC's have failed to invest in exploration, development, extraction, and extended recovery techniques that would support higher rates. 4) Short term greed - they are more interested in profits today than in increasing extraction rates. (corollary - they don't think they can increase extraction rates so they might as well minimize costs and maximize profits).

I am mainly in favor of explanation 1) -- these are profit making enterprises that are too small relative to global production to set prices themselves, so they have every incentive to maximize production and so this must presumably be the best they can do with the reserves available to them. Obviously the important caveats are that most of the reserves are under the jurisdiction of national oil companies, and also that there are some areas off-limits for longstanding environmental reasons that could allow some production if those restrictions were lifted.

If you think about it, the relative flatness is remarkable given the huge increase in oil prices over the last 10-15 years. The level of effort that the oil companies are making must be far greater now than it was, but they are only running faster to stay in the same place, or even slipping backwards a little.

Oil Production of the Top Three IOCs

2011-10-10T06:06:00.000-07:00

The above shows the liquids production of the three largest international oil companies (IOCs), as compiled from their annual reports. You can see that by and large these companies are about the same size they were 15 years ago, in oil production terms (the partial exception is BP which managed to buy into a Russian oil company half way through the last decade). The big IOCs have not been able to increase production much in response to the high prices of the last six or seven years.

It's important to note of course that since the 1980s most oil is not produced by IOCs but rather by the various national oil companies. Also it's worth noting that IOC revenues and profits have grown enormously over the last 15 years as oil prices have increased so much - they are basically selling roughly the same sized stream of liquids for far more money.

Steve Jobs

2011-10-05T17:06:00.000-07:00

This doesn't have much to do with the theme of this blog but, Ah Shit. I've personally been using Steve Jobs computers since I bought a NeXT Station and laster printer in 1991 with $10k of my fellowship money in grad school. I still have it: last time I checked, it still worked. Except for a couple of brief unhappy intervals when I was obliged to use Windows systems, I've been immersed long hours every day in Steve Jobs approved environments ever since. It's impossible not to grieve his passing, and copiously. He has almost single-handedly stood for the idea that technological devices should also be an artistic and harmonious fit with the human psyche. He was the world's greatest product manager.

It isn't going to be the same without him.

Eurozone Retail Spending Down Again in August

2011-10-05T05:15:00.000-07:00

Numbers out today from Eurostat:

In August 2011 compared with July 2011, the volume of retail trade fell by 0.3% in the euro area (EA17) and by 0.2% in the EU27. In July retail trade rose by 0.2% and 0.1% respectively.
In August 2011 compared with August 2010, the retail sales index decreased by 1.0% in the euro area and by 0.8% in the EU27.

It's not a precipitous slide at this point, but it certainly does seem that the Eurozone consumer is slowly retrenching. That's not going to help the Eurozone's problems - after all, consumers who are cutting back on eating out and shopping are probably not planning romantic getaways to Greece, Italy, or Spain either.

The Saudi Budgetary Constraint on Oil Prices

2011-10-04T06:19:00.000-07:00

You might imagine that the last decade has been pretty kind to Saudi government finances and you'd be right. The graph above comes from a report on the Saudi government budget from Bank Saudi Fransi and shows government revenues and expenditures in billions of Saudi riyals (the riyal is pegged to the US dollar at 3.75 riyals per dollar). The huge explosion in revenues as a result of the 2005-2008 oil shock is clear. Two things have happened as a result. The first is evident above - the government spends vastly more money than it did a decade ago. The second is that the government has all but eliminated the national debt:

A lot of the spending has gone for new infrastructure: capital investment is up almost 10X over the decade:

Clearly the party is not over in Saudi Arabia! No doubt this has a good deal to do with why the country didn't experience material instability during the Arab Spring.

My main interest here is to understand what oil price is now required to keep the Saudi budget in balance. Of course, given the low debt, the country certainly doesn't have to balance its budget every year (and didn't in 2009) but will likely want to keep oil prices high enough to do so most of the time. To examine this, let's look again at the graph from above of expenses and revenues:

The 2011 forecasts by Bank Saudi Fransi were prepared before King Abdullah announced an additional 500 billion SR in social spending in the spring, which is large compared to the existing budget. However, it's unclear how much of this spending will occur in 2011 since much of it is being allocated for construction of housing, hospitals, and schools. I'm guesstimating about 200b SR, so that henceforward government expenses are going to be around 800b SR - and probably climbing further if oil prices will allow.

To understand the relationship between government revenues and oil prices I took the product of Brent oil prices and Saudi annual production according to BP and plotted that against government revenue according to Bank Saudi Fransi. This is rough, of course, since the country sell a range of oil products, generally at a discount to Brent, and not all oil revenue goes to the government. Still, we get a pretty decent straight line that it seems like we can probably make reasonable inferences from:

Thus 800 bn SR in goverment revenue requires about 1150 bn SR in this Brent-approximate oil revenue. If we assume that going forward Saudi Arabia will be able to match the highest recent year of production (2005) then that requires a Brent price of at least $75 (on an annual average basis). If you compare that to recent prices:

You can see that the prices of 2005-2006 and earlier are unlikely to be seen again, and if a European financial crisis breaks out and drive prices down to the late 2008 level, that will be a huge buying opportunity. However, Brent is currently around $100 and may still have room to fall before triggering a Saudi reaction.

State of the Blog, Q3 2011

2011-10-03T05:32:00.000-07:00

I've been making it a practice to briefly discuss the state of the blog at the end of each quarter, and it's that time again (I actually forgot last quarter so this report can cover Q2 as well).

Overall blog stats are as above according to SiteMeter - these are individual visits/month since I started this blog in November 2009. Current readership level probably corresponds to something like 800-1000 people on a weekday and about half that on a weekend. You can see that the Arab Spring was very kind to me with readership more than doubling from late 2010 to a peak in May. Since those heady days things have been more discouraging! It's always a littler harder to see the stats sliding than growing. However, between my time at the Oil Drum and this blog I've been around long enough to know that the key factor is this:

Note that the peaks and valleys in my readership coincide quite well with the peaks and valleys of oil prices. Clearly people still see me primarily as a peak oil blogger. I have intentionally set the frame of this blog broader because I think peak oil is only one of several very important challenges that humanity faces. Still peak oil is a perfectly good place to start, and will hopefully lead to a broader conversation over time as my expertise and knowledge-base and blog-authority continue to grow.

My trick for motivating myself to get out of bed and blog when stats are sliding is still the same: I visualize my audience physically assembled in the cafe to hear what I have to say. Then it's easy. It's a privilege to have anyone pay attention to my thoughts and I'm deeply grateful to all of you. It also seems to me that there's still an overall upward trend underlying the oil-price driven peaks and valleys.

Of course oil prices (and thus my stats) could go lower still if the situation in Europe evolves into a full-blown financial crisis. Still, I think the Saudis can and will set a floor on Brent not too far below where it is now so hopefully the next trough in readership will at least be above the last trough!

August European Unemployment

2011-09-30T06:08:00.000-07:00

Data are out today from Eurostat and Eurozone unemployment was basically flat at 10%. I guess that counts as good news under the circumstances - at least it's not getting worse. It looks stagnant but not recessionary, so far.

My read on the European situation at present is as follows:

If European governments and institutions don't take adequate action, disaster will ensue and there will be another round of global banking/financial crisis.
Adequate actions are potentially open to them if they can come up with a sufficiently beefy centralized mechanism for funding and then gradually writing off the excessive private and public debts in the periphery and then recapitalizing banks as necessary.
Adequate action is currently politically infeasible, but may become politically more feasible as the consequences of inadequate action becomes clearer.
At the moment, there's no way to tell reliably whether or not, when push comes to shove, the political will can be found to do what's necessary.
Therefore global markets are sort of in a holding action with everything going more or less sideways while everyone waits for the European picture to clarify.

I guess one way of thinking about it was this: was Lehmann enough? With Lehmann, American policy makers tried the experiment of allowing a major financial institution to go under. The consequences of that were so severe that it was not tried again during the 2008 events. I imagine it will be a very long time before US policymakers try that particular experiment again. So now the question is does the lesson still hold sufficient force three years later and across the Atlantic that European policymakers will do whatever it takes to avoid failure of a major financial? Or will they need to repeat the experiment to see what happens this time? Or will their publics kick them out and bring in more radical policymakers who will repeat it?

On another note, the European inflation preliminary estimate came out at 3% in September, up from 2.5% in August. That will not make the rather hawkish bankers at the ECB happy.

2011 Corn and Soybean Yields

2011-09-28T06:14:00.000-07:00

2011 seems to have been a slightly crazy year weather-wise. For example, Climate Progress notes that there have already been more FEMA declared disasters in 2011 than in any prior year, with three months still to go. Between tornadoes and floods in the midwest, droughts in Texas, and hurricanes and tropical storms on the East Coast, the weather has been in the news a lot. I was curious to know whether this showed up in a big way in crop yield data (since effects on crop yields are presumably the primary way that climate change might seriously threaten civilization).

Of the three big field crops, the 2011 yield data are available from NASS for corn and soybeans, but not yet for wheat. The raw yield data are above. You can see that 2011 is a bit of a jog down but doesn't look like a marked departure from trend. My assumption is that generally the trend is dominated by improvements in agricultural technology, while the year-to-year noise is mainly due to weather.

To get a clearer idea of the context I constructed a variable which consists of the percentage change of this year relative to the average of the prior ten years. That looks like this:

Prior to around 1940 corn yields were pretty flat and so this index fluctuates around zero with 10-20% fluctuations being pretty common. After that, yields have been improving so the average is not zero but positive - this year is typically better than the average of the past ten - but fluctuations continue to be large. In particular, 2011 is not the worst downturn in yield in the post 1940 era in either crop - four or five other years are worse. However, it certainly was a worse performance than average.

So at the moment there doesn't seem to be much evidence for the proposition that the weather is getting bad enough to present a serious threat to the US food supply. Not to say it couldn't in future.

Food Prices Still Elevated

2011-09-28T05:21:00.000-07:00

It's been a few months since I checked the UN Food and Agriculture Organization's Food Price Index. The above shows the latest data (through August). As you can see, food prices, after rising very sharply in 2010, have stabilized near their recent peak level. Presumably this has been aided in part by the slowdown in the global economy since the spring - though the leveling out began before then.

It's important to note that this FAO index only goes back to 1990 but food prices have been much higher before then.

Do Stock Market Declines Predict Recessions?

2011-09-26T05:57:00.000-07:00

Does the recent stock market decline tell us anything about the odds of a coming recession?

Well, if history is any guide, the stock market does sometimes successfully predict a recession ahead of time (see the red circles in the above log-scale graph of the S&P 500 since 1960). However, there's at least as many episodes of similarly large declines that did not segue into a recession (green circles). So, knowing nothing else, you'd say the recent stock market decline has roughly a 50% chance of ending in a recession (and if it does, it will go down a lot more).

Interesting to note that there's at least a couple of recessions (1980 and 1991) where the stock market did not see it coming.

US Initial Claims Data

2011-09-26T05:35:00.000-07:00

The weekly data on initial claims for unemployment insurance (UIC) is an incredibly helpful series for economy watchers. As shown above, recessions are strongly associated with sharp rises in claims that then get sustained. But the data are weekly so offer one of the best real time indicators of the kind of wave of mass fear amongst employers that occurs during recessions.

Events in Europe recently have got to have raised the odds of a US recession, but it clearly is not happening yet - the UIC are still at an elevated level following the last recession but show no signs of a new spike.

Chinese PMI

2011-09-23T15:14:00.000-07:00

Above is PMI index based on the Markit/HSBC survey of Chinese purchasing managers. Definitely looks like a slowdown, though right now it looks more gradual than abrupt.

Eurozone PMI

2011-09-22T07:11:00.000-07:00

Here's the key graph from the Markit PMI press release. This is from their survey of Purchase Managers in September so provides a more real time indicator than official indicators. That's certainly not an encouraging reading at all.

European Industrial Production

2011-09-22T06:23:00.000-07:00

Above are the latest numbers on Eurozone industrial new orders, including the latest data point - July - which just came out today. As you can see July has a drop which could be the beginning of a new downtrend, but which is also not so big that it might not be just noise. Indeed the report notes:

In July 2011 compared with June 2011, the euro area (EA17) industrial new orders index fell by 2.1%. In June the index dropped by 1.2%. In the EU27 new orders decreased by 0.8% in July 2011, after a fall of 0.8% also in June. Excluding ships, railway, and aerospace equipment, for which changes tend to be more volatile, industrial new orders rose by 1.4% in the euro area and by 0.9% in the EU27.

Either way, this index is still not back to it's pre-recession high. It will be very interesting to find out what this series did in August.

Per Capita Oil Consumption Around the World

2011-09-21T05:52:00.000-07:00

Following up on yesterday's post of global oil production per capita, the above graph shows oil consumption per capita for an illustrative selection of countries around the world (along with the world line in black for comparison). You can see that the developed countries all had peak consumption in the 1970s, fell in the early 1980s, then were flat for a while and began declining again. In Europe, that second decline began in the mid 90s and has been gradual. In the US it started in 2005 and has been rather abrupt.

Things are never going to be quite the same again:

At least not in the US. In Saudi Arabia, they are apparently having tons of fun with consumption having shot up to a staggering 40 barrels/person/year in the last decade. Iran too has experienced sharp growth in consumption, albeit from a lower level. Though I imagine the beach parties aren't quite the same when the girls have to wear burqas.

To see the developing countries more clearly here's the same data with the y-axis blown up:

India, China, and Brazil have all been growing their per-capita consumption rapidly in recent years, unlike the West. China and India still have considerable distance to go before reaching the world average, however.

Broadly speaking then, the developed countries have been cutting per-capita oil consumption and will be doing so further, in order to make room for consumption in the more rapidly growing economies of the developing world. There are two ways for these cuts in consumption to happen: use oil more efficiently in the economy, or have less economy. Since 2005, in the US, we are mainly taking the second approach.

Peak Oil Per Capita

2011-09-20T05:44:00.000-07:00

A reader asks to see a graph of global oil supply per capita - here it is. The global population data are from the US census bureau, and the oil supply data are from ASPO through 1979 and EIA total liquids after that (the two sources agree to within a percent or so in the overlap).

If you were wondering why things have never been the same after the 1970s energy crises - now you know. On the other hand, if you've been panicking that peak oil means the imminent end of civilization - settle down. In a per-person sense it happened decades ago and we've been living in the aftermath ever since. Peak oil is a slow squeeze.