Transcript Energy use* + 35%, fossil fuels + 26% - Indico

70th birthday celebration in honour of
Sir Chris Llewellyn-Smith
20th November 2012, CERN
Energy: Wishes versus Expectations
Christopher Allsopp
New College, Oxford, and
Oxford Institute for Energy Studies
The Scale of the Challenge
• International Energy Agency ‘new policies
scenario’
- assumes successful implementation of all agreed national policies
and announced commitments designed to save energy and
reduce use of fossil fuels
•Projections for 2010-35:
•Energy use* + 35%, fossil fuels + 26%
•- almost all from developing countries
•* nuclear + 58%, hydro + 65%, bio-energy + 47% , …
• BP thinks that in the shorter period 2010-30
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- energy use will rise 39%
•
- fossil fuels + 31%
Could we better the IEA’s New Policies Scenario
(2010-35 :energy + 35%, fossils + 26%)?
On paper, yes. IEA’s 450 ppm scenario has
Energy only up 16%, Fossil fuels down 10% in 2010-35
But this requires nuclear +116%, hydro + 83%, bio + 75%, …
Might we do worse that BP’s realistic prognosis?
Yes. IEA’s business as usual scenario has fossils up 35% by
2030, while BP has 31%
BP Energy scenarios to 2030 (BP 2011)
Plus combustible renewables and waste:
10%
9%
24%
An indicator of oil price impacts. Petroleum expenditure
as a share of nominal GDP.
Typical oil price shock ~ 3% GDP. Recent fall and rise ~ order
of 2% GDP
Like an indirect tax change (Fuel duty; VAT)
9
World
8
7
OECD
6
US
5
4
3
2
1
0
1970 1975 1980 1985 1990 1995 2000 2005 2010
+ 10% combustible renewables & waste
+ 9% combustible renewables & waste
+ 24% combustible renewables & waste
Downside risks
• Eurozone
– Toxic mixture of
• Sovereign debt crisis on periphery (Greece especially)
• Banking crisis
• Longer term competitiveness problems
– Self fulfilling crisis? Liquidity and solvency
• But : international central bank action?
• US fiscal paralysis
– But Obama jobs plan (reversing fiscal consolidation – but politics)
– The ‘fiscal cliff’. (Fiscal tightening in the US of 3 -4 % GDP if nothing is done).
– Generally, austerity is not working.
• Hard landing in the brics? China hard landing?
• Some grounds for optimism?
– Cumulative effect of deficits: corporate surplus (e.g. US and UK)
– Offsetting strategies in non-OECD (Brazil, Turkey, Korea China). Soft landing ?
– Monetary policy offsets (QE3, etc. )
The Eurozone
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The countries of the Eurozone chose to join a monetary union.
Fiscal policy was devolved (under the ‘Maastricht assignment’ (Issing)) to national governments,
constrained by the SGP (3% deficit, 60% debt to GDP).
No system of inter-country, automatic transfers. (Unlike in the United States and other federations).
German politicians refer disparagingly to their dislike of a ‘transfer union’.
Financial crisis arrangements were totally inadequate. Devolved and different regulatory systems. No
system of Eurobonds (risk sharing) . No fiscal guarantee for country borrowing or bailouts . An accident
waiting to happen!
The system was failing well before the financial crisis.
Divergence of competitiveness positions, and balance of payments divergence.
It is very difficult to design fiscal policy to deal with divergence. The Maastricht fiscal rules made the
problems worse. (Fast growing countries (e.g. Spain) had good budget positions, and low real interest
rates).
Technically (1) real exchange rates need to adjust appropriately (Price level targeting) and (2) real interest
rates move perversely. (Eg low or negative in Spain and Ireland, much higher in Germany (the Walters
critique)
Before the crisis, Spain and Ireland had fiscal surpluses: Germany and France violated the SGP rules.
Conveniently forgotten (especially in Northern Europe).
Very badly designed and vulnerable to shocks
Role of banking sector problems:
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–
–
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Primary or secondary
Probably the latter
But they make the overall situation much worse – Inter-country bank run. (De Grauwe)
A banking union - needed but long term.
Competitiveness flying apart from inception: internal devaluation
(correction) very difficult. Cf. Ireland. Note position of UK outside the
Eurozone. UK real exchange rate has improved even relative to Germany.
Sectoral balances – Europe
‘Mirror image’ Spain v Germany, Portugal v Spain. Flying apart
Germany: Sectoral balances
% of GDP
12
F'cast
9
6
Private
sector
3
0
-3
-6
Current
account
-9
Public
sector
-12
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Source: Oxford Economics
Eurozone is in a vicious fiscal spiral
Discretionary fiscal tightening, 2011-13
% of GDP, total 2011-13
Germany
France
Eurozone
Italy
Greece
Ireland
Portugal
Spain
0.0
2.0
Source : Oxford Economics
20
4.0
6.0
8.0
10.0
Overall north/south imbalance. No plan for rebalancing
Eurozone: Current account balance
% of GDP
6
North*
4
2
0
-2
-4
-6
-8
South**
-10
-12
* Germany, Netherlands, Belgium, Austria & Finland
** Italy, Spain, Greece & Portugal
-14
2008
2010
2012
Source : Oxford Economics
2014
2008
2010
2012
2014
Debt dynamics
∆b = b(r – g) + x
b = debt to GDP ratio
r = interest rate
g = growth
g = primary budget deficit as proportion of GDP
Italian example (notional)
Debt ratio, ~ 120% GDP. Real interest rate ~ 3. Growth ~ 2% pa.
Primary surplus. Solvent!
Now, interest rate 6%, growth about –2. Insolvent! Self fulfilling!
What’s wrong with the eurozone?
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The Eurozone was, initially credible – with convergence of long interest rates. (But Walter’s critique,
and divergence)
The crisis led on to the ‘sovereign debt crisis’ for southern peripheral countries and Ireland.
The situation became toxic when exchange risk (chance of leaving euro) mounted.
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Correlated with external position (B of P) and borrowing, and competitiveness. Not correlated with
government debt and deficits.
Several things missing in Euro area
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–
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Fiscal backing for financial support operations. (Would/will the German fiscal system back Italian/ Spanish
banks/ debt)
Common financing (such as Euro bonds)
Automatic fiscal transfers for parts of the area in trouble (cf. US, UK)
•
Policy gradually moving towards what is needed – but much too slowly. German resistance. The
adding up constraint. Policy focused in the wrong place – Budget deficits and debt, rather than
financial crisis management and the adjustment of competitiveness.
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The accounting identity
Private sector surplus = government deficit + balance of payments surplus.
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Germany has about 6% GDP external surplus. Counterpart in periphery. (This is accounting, not
economics!). Netherlands even worse.
Fixing the eurozone: but what if the politics fail?
• In principle, it is easy,
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Fiscal coordination
Higher inflation (and growth in countries such as Germany)
A banking ‘union’ (especially for crisis management)
Intercountry fiscal transfers (cf US)
Major competitiveness changes (Germany, Netherlands, vis a vis Spain.
Portugal and Greece).
• Consensus forecasts (such as IMF) assume progress on all these!
• Recent moves by ECB are a major step forward, but not yet a solution.
Eurozone: Sectoral financial balances
% of GDP
10
Forecast
8
Eurozone in aggregate is not
the problem.
6
Private sector
4
Current account
2
0
-2
Public sector
budget
-4
-6
-8
1990
1994
1998
Source: Oxford Economics
2002
2006
2010
2014
What if?
• Simulations are difficult – major uncertainties.
• Oxford Economics – about - 6 % growth in euro area after
multiple exits. Major effect on world economy
Other risks: fiscal cliff, China hard landing, Euro
exits plus China hard landing