Black Gold

[peterbirks]

A news item this morning reported that Brazil's recent oil discoveries could cost $240bn to bring "on stream", some $100bn more than the previous most expensive development. Of course, if oil is trucking along at $120 a barrel or more, then it's all fine and dandy.

But how much is $240bn? Well, it's about 3 times the impact of Hurricane Katrina. Money being put into oil development would seem, therefore, to have an impact on current consumption. On the other hand, the question is, how much is "extra" (i.e., how much is being diverted from other investment?).

I tried to find a number for the world's gross domestic product and all I could come up with was the guesstimate of just over $32tn, which equals 80 Hurricanes of 2005. But those numbers are deceiving, because there's what one might call "discretionary" GDP and "non-discretionary" GDP. Massive hurricanes hit the discretionary side, whereas oil investment only partially hits the discretionary side.

I was wondering about that because it seems clear that the credit crunch and the subprime crisis might only be about $300bn in total (1% of the world's GDP and, interestingly, about on a par with the world's retail drug trade each year) but that probably hits the discretionary side far more than the non-discretionary side. Combine that with a significant hurricane season in 2008 (if that happens) and you kind of wonder how well the world economy will cope.

But, how much of the world's GDP could be described as "discretionary"? I don't know, because I don't think that any work has been done on this. Rule of thumb numbers put it at about 10% in the US, but it would be far less in the third world. So, let's guess at 8%. That gives us a discretionary world GDP (money that can be diverted from A to B) of $255bn every year.

If the credit crunch came to $300bn, and if we amortize that out over, say, five years, then that still leaves us with very little leeway against even a moderately serious hurricane season. But if we were to get an earthquake in a highly populated area of California, or if there were a repeat of the, er 1933? hurricane that hit New England, then that would wipte out discretionary GDP as sure as eggs is eggs.

So you THEN get the situation where you have to take money from where money can't be taken (i.e., the situation in Britain during World War II). The other option is to go onto a war footing and to increase GDP. That is, everyone works harder (another strategy used in World War II).

But, it's one thing fighting the Germans; it's a bit harder to explain to people that you are at war against a GDP crisis.

__________

Comments

[jaybee66.livejournal.com]

Don't worry about hurricane seasons.

Though the odd hurricane may be highly destructive (and not necessarily hit the land where it matters) current research suggests that global warming will result in fewer hurricanes.

As last year, my "money" is on a less than average hurricane season.

However, warmer temperatures will create a rising sea-level and the displacement of coastal cities and populations. That will cost more than a single hurricane as a sea-level rise affects the whole globe and not just hurricane landfall.

[(Anonymous)]

Isn't the spread of spending to rebuild from hurricanes/earthquakes etc also spread over a few years. Is New Orleans fully rebuilt yet?

[peterbirks.livejournal.com]

Yep, good point. Clearly there's a long degree of amortization in this as well (see the Twin Towers for another example of this).

PJ

On being economic without the truth

[real-aardvark.livejournal.com]

I've always thought that most macro-economic models and theories are sheer bollocks. I have yet to be convinced that "GDP" exists, in any measurable way. And surely you're talking about the result of GDP, not GDP itself? That is, the consumption end of the thing -- ie investment, at this level -- and not the production itself.

It's all one horrible feedback loop, and it reminds me so much of fluid dynamics that I wish to avert my eyes at this point.

However: 'Brazil's recent oil discoveries could cost $240bn to bring "on stream."'

Interesting, but utterly irrelevant. One would imagine that this is not a single $240bn lump sum. Even ignoring the effect on Brazil's GDP in general, and concentrating on the re-investment into oil infrastructure, financing, and the like, this is surely about the best amortised bet you can find. A simple spreadsheet model should suffice to figure out which bits of which fields should be developed when, and how.

Or are we just going to get some giant cocktail straw and suck $240bn worth of oil out in one go?

That would be a shame. I was planning to use the cocktail straw in question for various important business purposes in Colombia.

Re: On being economic without the truth

[peterbirks.livejournal.com]

Indeed, just as I was looking up definitions of GDP, GNP and the like, I thoiught to myself "hold on, isn't there some double counting here?" and, secondly, "hmm, these numbers are a lot of bollocksa, aren't they?" B

But, I was actually just bouncing ideas: 1) the actual cost of extracting the oil: 2) the actual impact on the economy of a serious hurricane season and/or an earthquake in California: and (3) whether the concept of "discretionary" and "non-discretionary" GDP had anny value as a concept.

Curiously, even though I'm not happy with the concept of GDP, I quite like the distinction between discretionary and non-discretionary. If Gordon Brown had paid attention to that he might have worked out that just pumping an extra 100% straight into the health service is not 10 times more effective than pumping in an extra 10%.

PJ

Re: On being economic without the truth

[real-aardvark.livejournal.com]

I've got to say that I was hooked by the concept of discretionary vs non-discretionary "whatever the fuck it is" as well. I'm going to take it on trust that you're correct, and not much (if any) analysis has been done in this area.

Of course, none of this is discretionary in the sense that a government picks a fiver out of its back pocket and chooses to spend it on -- to take an extremely unlikely example -- shoring up the levees in Louisiana, rather than buying another pack of fags.

There are obvious limits to what can be mustered in discretionary terms, and these limits are constrained by liquidity, confidence in the bond market, and the like. "Discretionary GDP isn't even a constant across governments. What might be discretionary for the US is certainly not discretionary for Russia, China, or even France. Otherwise Madagascar would still be entirely without paved roads. (And yes, this is a realistic example.)

So, extremely interesting ideas, but I think (1) is in a different, non-discretionary, arena; (2) is where you get into, ahem, the modern version of double-entry book-keeping; and (3) might be true if anybody paid any attention to it. Futures in Third World Discretionary GDP, now there's a concept. I will have my people look into it instanter.

FWIW, I think the major New Labour blunder (well, there are so many) was to stick to Conservative spending targets for the first three years ... and then splurge. If you've got under-funded and under-invested public services that you are ideologically committed to reflate eventually, it makes little economic sense to run them down for another three years first.

But you're right. The whole thing was an asinine cock-up (garnished with PFI). It makes one wonder what possible function the mandarins of the Civil Service perform in a post-Imperial society.