Thursday, June 16, 2011

May Global Oil Supply and the Libyan Mini Shock

The above graph shows the latest available data from the three agencies that publish estimates of global oil production (the EIA, the IEA, and OPEC).  According to the IEA, production increased by about 270 thousand barrels/day in May.  However, as you can see, we have not yet made up the loss of Libyan oil in February and March.

The gap between what has happened and continuation of the existing trend (during the recovery from the great recession) looks as follows:

The gap between the black line (average of the three agency's data) and the purple line (approx projection of what might have happened absent the Libyan revolution) is about 1.6mbd, or about 1.8% of global production - call it 2% to this level of accuracy.  Note that the 1.6mbd from the graph above is in excellent agreement with the level of Libyan oil production before the revolution.

My expectation for the impact of an unexpected 2% loss of global oil production would be that it would cause a sharp rise in oil prices, followed by a slowing of the global economy, but that it would not be enough to cause an out-and-out recession by itself.  My first estimate would be based on the IMF's estimate of the income elasticity of oil of about 2/3.  That would lead you to expect a reduction in global growth of about 1-1.5% (1.8% * 2/3 = 1.2%).  However, the damage would be worst in particularly oil dependent places like the United States.

And indeed, Catherine Rampell tells us:
We’ve had a slew of distressing economic data come in during the last few weeks. As a result, economists have been steadily downgrading their forecasts for economic growth in the second quarter. Today’s news is no exception; after a major bummer of an inflation report, Macroeconomic Advisers, the highly respected forecasting firm, lowered its annualized second quarter G.D.P. forecast to 1.9 percent.

For reference, when the quarter began, Macroeconomic Advisers was expecting 3.5 percent growth. And way back in February, the firm was projecting 4.4 percent.
So US growth estimates have been revised downward by a couple of percentage points.  That sounds in the ballpark, maybe on the high side.


Mike Aucott said...

It is likely that the actual growth in gross energy up until February was somewhat less than the total liquids production indicates, because increasingly more of the liquids quantity consists of fuels with lower energy content (e.g. NGLs, ethanol). When you factor in the almost certainly gradually declining average EROI of the conventional fossil fuels in the mix, the total net energy available to the economy is even less. (For some more detail on this view, see So, the recent numbers may be well within the ballpark.

kjmclark said...

There are only three candidates for forces pushing the economy back into slowdown. We certainly can't blame this on the Fed and interest rates. There's the ongoing real estate mess, which *is* ongoing and hasn't really changed much since 2009. That's not likely a reason for this slowdown, though it is a constant drag.

Next is the ending federal stimulus. That was counteracting the housing drag. As the stimulus ends, we would expect somewhat slower growth. But this is slowly petering out - 83% of the funds have been spent, and it will take another few years to get to zero as projects get completed.

Finally there's the increase in oil and food prices. Oil prices rising is a good part of the food price rise too.

So I'd say the real estate drag and stimulus ending are mostly enough to counteract weak business expansion, and between the general debt problems and oil/food prices increasing, we have enough to counteract most of the potential increase in consumer spending. Really, higher oil prices are the biggest part of that, and Libya does explain most of the increase. I think you're right on.

Nick G said...

It's worth keeping in mind that the direction of causality in the IMF's estimate of the income elasticity of oil is from GDP -> oil consumption. It's not really valid to use it the other way round.

For instance: the US income elasticity of oil was in the same range until the 1970's. From 1978 to 1982 oil consumption fell by 18%, while GDP grew slightly.

Since 1979, US oil consumption has been flat overall, while GDP has grown by 150%.

Estimates of income elasticity of oil are heavily influenced by the period before 2004 when there was always slack production capacity, so when economic activity rose, oil consumption could rise as well.

We can't assume that the opposite direction of causality behaves the same way. Obviously rising oil prices will have an effect, but it will be much weaker than the effect in the other direction pre-2004.

Derwein said...

Thanks for the figures Stuart. Looking at the estimated gap (1.6 mb/d) between what would have been expected and what actually occurred you might have expected this gap to affect stocks of crude oil and products.

However, as far as I can see there is little sign of the loss of supply in stock data either from IEA or EIA. Anyone who have another view on the stock data or would like to comment on this?