Monday, April 23, 2018

"Extend & Pretend"...Replaced by "Brace For Impact"

Once upon a time, skeptical analysts cross checked stated growth versus energy consumption...looking for discrepancies as energy consumption is a good proxy for actual economic activity.  Nowadays, the model of printing highly politicized and/or skewed economic data has gone very global.  So, I thought to offer a couple broad variables to gauge the global economic progress; 1) total primary energy consumption data by region, cross checked against 2) their consumer bases (the 0-65yr/old populations).  I break the world down into four different regions to gain a better vantage of the purported global recovery, as follows:
  • OECD (List of 35 nations) representing 17% of global population & 43% of total energy consumption
  • Combined Africa / S. Asia (S. Asia = India, Pakistan, Afghanistan, Bangladesh, Nepal, Bhutan, Sri Lanka, Maldives) representing 41% of global population & 9% of total energy consumption
  • China, representing 19% of global population & 22% of energy consumption
  • "RoW" or Rest of the World, representing 23% of global population & 26% of global energy consumption
The first chart below shows total global primary energy consumption in quadrillion BTU's from 1980 through 2015 according to the EIA (US Energy Information Administration).  2016 is estimated based on extrapolating data from the 2017 BP Statistical Review.  The flattening in consumption since 2012 is plainly visible in the upper right and clearly detailed in the year over year columns in the lower right.  The arrows highlight minimal growth or outright energy consumption declines that were associated with recessionary periods.  The weakness of the current period since 2012 is unparalleled since 1980 and even more significant than the brief downturn of 2009.
The next chart again shows global primary energy consumption (quadrillion BTU's), but broken out by regions.  As of 2015, the OECD nations are consuming less energy than during the 2008 global recession and in fact are using less than they did fifteen years ago, in 2000.  China has increased energy consumption by about 200% since '00, the combined Africa / S. Asia have increased consumption by about 70%, and the RoW have increased by about 40%.  Quite noticeably, total global energy consumption is essentially unchanged from 2012 through 2016 as the OECD declines have offset minor increases across the other regions.

The chart below shows global primary energy consumption, by region, as a percentage of all energy consumed.  Noteworthy, the long declining OECD portion of total energy consumption, the more than doubling of Chinese consumption from '00, and the flattish consumption from Africa / S. Asia and the RoW.
So, what is going on?  The first thing to check is the changing populations of the four regions (particularly the core 0-65yr/old populations) that drive spending, housing, jobs, credit, and growth.

OECD
The 35 nations that make up the OECD represent 17% of global population but 43% of total primary energy consumption.  The OECD core population is now outright declining and by 2035, is estimated to see a 5.5% (five point five) decline.  This is assuming birth rates and fertility suddenly, and unlikely, surge as the UN and Census have been assuming ever since 2008.  However, assuming birth rates and fertility continue their decade plus downward trend, even more significant declines will ensue and the under 65yr/old population will be below the mid 1980 levels by 2035.  Also interestingly, despite the 50% to 75% fall in energy prices since peak consumption way back in '07, demand continues declining.

CHINA
19% of global population, 22% of global energy consumption.  China's core began declining in 2017 but the pace of decline begins ramping quickly, so much so that China is estimated to see a 10%+ core decline from '18 to '35 (but as with the OECD, this assumes a surge in fertility rate that is not happening (Termination of China's "One Child" Policy...Much Ado About Next to Nothing )...so actual declines likely to be significantly larger than 10%).  What was once as many as 20 million more potential core consumers annually is now millions fewer every year...indefinitely.

Rest of the World
23% of global population, 26% of global energy consumption.  10% increase in core population from '18 to '35 but growth is significantly decelerating.

Africa / S. Asia
41% of global population but just 9% of global energy consumption (the combined regions likewise consume just about 9% of the total Chinese exports).  From 2018 to 2035, combined core population growth of 27% while YoY growth remains flattish (Africa's accelerating growth offsetting India's decelerating growth).  As of 2018, these combined regions represent 83% of global under 65yr/old population growth...but by 2035, Africa alone will represent 100%+ of the fast decelerating global under 65yr/old growth.

Global Oil Consumption
Like the total energy consumption chart above, the OECD oil consumption peaked in 2005 and as of year end 2017, OECD oil consumption is back to levels last seen in 1997 (over a 6% total decline in consumption).  The 3mbpd decline among the OECD has been more than offset by the 5+mbpd increase in China, 7mbpd increase among the RoW, and 3mbpd among the combined Africa / S. Asia.
As an aside, OECD oil consumption trend growth ended as of Q4 '07...and quarterly variations in consumption have been "unusual" since.

Finally, for those who don't understand the gravity of this broken trend-line in the chart above...the OECD is the global import engine that provided the growing markets for developing nations of the world to export their way to prosperity.  What began post WWII as a pathway to "export your way to prosperity" with Germany and Japan, spread to Taiwan, Korea (etc.), and eventually China.  However, since the OECD and potential import markets are no longer growing, the exporters no longer have a viable rationale to grow their capacity, their jobs base, their GDP.


China alone since 2000, as a quasi "communist" state, was able to "compel" corporations and local governments to undertake massive debt fueled build-outs to achieve "growth" targets.  New factories, housing, malls, infrastructure, etc. were built for a domestic population now embarking on a large decline and a global import base which has indefinitely stalled.  Now the massive Chinese overcapacity sits rotting and no other nation (of significance) can compel their corporations and the like to undertake similar levels of bad debt to keep the "growth" going.


This notion of an imminent "S-Curve" lifting India or Africa to prosperity is simply ludicrous.  That a fast growing group of poor in Africa and S. Asia, in need of selling their labor and resources to a now declining base of buyers in the OECD, China, and decelerating growth among the RoW (all with too much and still growing capacity as it is), is delusional.  Very unfortunately, a synchronous and intertwined financial, economic, and currency collapse is highly likely as central banks and federal governments worldwide are undertaking progressively worsening policies and interventions to extend and pretend...even if it's just weeks or months now instead of years.