National Economy 2015S

PETROLEUM ECONOMICS
2015
The National Economy

Venturing into Macroeconomics
A popularised and politically incorrect version
PETROLEUM ECONOMICS
2015
Why economics?
Most countries need economic growth only to
keep pace with the population increase
Most people in most countries need economic
growth to improve the standard of living
Economic growth requires the best use of limited
resources (as does the environment!)
Economic growth can only be achieved when there is

value added in the production process
Value added
PETROLEUM ECONOMICS
2015
Why economics?
Added value can only be measured using market prices
2 + 2 = 5 ?
Economic growth takes time
Economic growth requires that obsolete

industries are shut down and obsolete products
are phased out
Economic growth requires that new industries
and new products are encouraged to bloom
PETROLEUM ECONOMICS
2015
Why economics?
The overall objective should be work for
everybody (your lecturers philosophy)
In a balanced economy companies go bankrupt
and the employees loose their jobs
and school-leavers cannot expect to find their
preferred job immediately
But the economy must be so well-managed that longterm unemployment is kept at a minimum
and that any school-leaver or jobless person

has a good chance of finding employment
within a reasonable time
PETROLEUM ECONOMICS 2015
The Purpose of Economic Activity

Added value !!!!
Input: Resources
in limted supply
Output
Goods
Energy
Raw
materials
Qualified
labor
Production
facilities
Environment
Process
Final use
Consumption
Investment
in plant
Services
Value of consumption and investment in plant

must be greater than the value of the input,
the difference being added value.
Added value: Best possible use of input

Input: Resources
in limted supply
Output
Goods
Energy
Raw
materials
Qualified
labor
Production
facilities
Environment
Process
Final use
Consumption
Investment
in plant
Services
Added value can only make sense

if market prices are used
If not, you stand the risk of using up
more input than you have output !

Physical output and use
Output
Goods
Money use
Final use
Consumption
Investment
in plant
Spending
Saving
Services
Who can save in substantial volume ?

Rich people, companies, institutions
(pension funds), and the government
- and the sum of all small savers
PETROLEUM ECONOMICS
2015
Savings and Investment

What happens when investment drops and
savings go up ?
=> significant drop in demand for goods and
services
Economic growth requires the best use of limited
resources (as does the environment!)
Economic growth can only be achieved when there is

value added in the production process
Value added

Input: Resources
in limted supply
Output
Goods
Energy
Raw
materials
Process
Qualified
labor
Production
facilities
Environment
Exports X
Abroad
Final use
Consumption C
Imports M
Investment
in plant I
Services
Gross Domestic Product

GDP = C + I + (X M)
Note that C and I include government
consumption and investment, normally denoted G

Input: Resources
in limted supply
Output
Goods
Energy
Raw
materials
Process
Qualified
labor
Production
facilities
Environment
Exports X
Abroad
Final use
Consumption C
Imports M
Investment
in plant I
Services
Gross Domestic Product

GDP = C + I + (X M)
GDP + M X = C + I
Trade balance and Current account
Trade balance: Difference between payments for

imported goods and services and money received from
export of goods and services
Current account: Difference between money flowing into
the country and money flowing out. Includes trade
balance, loans, interest on loans, and income from
investments
Capital account: Difference between money for
investments flowing into the country and money
flowing out.

Balance of Payments
Balance of payment:
Current account + Capital account
Invisibles: All money flows except
payments for goods
Invisibles include:
Payment for services
Loans, interest, investments
Tourism, smuggling of money
Norwegian individuals buying houses in Spain
Trade balance and Current account
All countries have the objective of a balanced or

positive current account
But this is globally a 0-sum game, so that is impossible
to achieve for all countries at all times. This means
some countries will be in debt
In practical life, countries with surplus buy up companies,
property and shares in companies in countries with deficit
(oil exporting countries and China buying up in the US). This
reduces the debt burden of the country in deficit.

An important parameter when
assessing country risk is
Government net debt as % of GDP

Another important
parameter when
assessing country
risk is Budget
deficit as % of GDP
In the EU, it should
be maximum 3 %
China is not member
of the EU
Rank
2
8
22
24
25
27
33
36
39
44
58
65
68
74
88
103
134
Country
Ireland
Azerbaijan
United Kingdom
Spain
Greece
United States
France
Japan
Portugal
Iceland
India
Nigeria
Russia
Italy
Brazil
Germany
China
%
37.96
15.91
10.06
9.66
9.40
8.93
7.83
7.66
.
.
.
.
.
.
.
.
6.76
6.06
5.51
5.36
4.99
4.36
3.63
2.11
.
.
.
.
.
7.42 .
.
.
The Big Mac Index

Global Exchange Rates
THE Big Mac index was invented by The Economist in 1986
as a lighthearted guide to whether currencies are at their
correct level. It is based on the theory of purchasing-power
parity (PPP), the notion that in the long run exchange rates
should move towards the rate that would equalise the prices
of an identical basket of goods and services (in this case, a
burger) in any two countries.
For example, the average price of a Big Mac in America at the
start of 2015 was $4.37; in China it was only $2.57 at market
exchange rates. So the "raw" Big Mac index says that the
yuan was undervalued by 41% at that time.
The Big Mac Index
Global Exchange Rates

Overvalued
Undervalued
Interdependencies in the National Economy

Exchange rate
Inflation
Share prices
Employmen
tCurrent
account
(incl. Trade
balance)
Interest
rate
Growth
Interdependencies
Inflation and exchange rate:
When inflation is higher than in other
countries, the exchange rate of own
currency must go down (depreciate)
When the exchange rate goes down, imported
goods become more expensive
higher inflation
Interdependencies
Exchange rate and interest rate:
Higher interest rates are necessary to

attract deposits in local currency when the
local currency depreciates,
and to stop
flight of capital to other currencies
The government (the national bank) will try

to keep the exchange rate up to avoid
higher inflation
This may lead to overnight interest rates of
5,000 % on an annual basis and is normally
(read: always) a lost case
Interdependencies
Inflation and interest rate:
Real interest rates must remain positive
Real interest rate i = i - f
1+f
So when inflation goes up, interest rates

go up, in order to maintain current i > f
Higher current interest rates mean less to
spend on goods and services for those who
have loans
inflation may go down
but unemployment increases
so the question arises
do you prefer pest or cholera ?
and this is what people answer:
Financial crisis - why ?

China and other emerging economies as well as oil
exporting countries export much more than they import
USA and some other industrialized countries import
much more than they export
so that the currrent accounts of many of the importing
countries have deteriorated over a long period of time
Meaning that the US owes lots of money to China

(and to a number of oil exporting countries)
Imbalance in the Trade balance

Physical output and use
Output
Final use
Chinese
goods
US
Consumption
Norwegian
oil
Chinese
banks
Norwegian
banks
Money use
US
banks
US banks owe USD to Chinese

and Norwegian banks
but the USD never move
outside USA !!!
so the US banks have lots of
deposits and need to find
borrowers
US deficit
Chinese and Norwegian accounts in US banks may
1 Remain as bank deposits
(Chinese banks have deposits in US banks.
Cash in StatoilHydros balance sheet)
2 Be used to buy shares
(the Norwegian State Pension Fund)
3 or property
(Chinese property developers in California)
But in the the case of 2 and 3 the money will
only end up other US banks as deposits
needing to find borrowers
Remember: The demand according to 2 and 3 above
helps drive prices of property and shares up
US deficit and financial crises

Supply and demand:
We have a huge supply of money
Interest is the price for money,
so interest rates are forced down.
Also, interest rates reflect expected inflation, and
efficient and rapidly expanding Chinese production has
kept inflation down in the importing countries
even in a period of growth and high employment
meaning that consumers borrow more for houses
and cars and save less

Oil exporters are the main drivers of global imbalances:
Source: The Economist
* Largely OPEC, Norway and Russia

And here are the culprits:
2008

The fundamental reason for the financial crisis was the
imbalance in trade between China and USA
This created too much lending to property, based on
property prices that were not sustainable
Rotten loans triggered
the crisis, as houses
were put on the market
with few buyers
And George Bush jr
let Lehmann brothers
go bust, causing total
meltdown

US industry has been reluctant to invest after the
dotcom crisis in 2000. That means they save
relatvely more and borrow less
And the US banks have even more deposits to lend
to individuals
The subsequent demand for houses drives prices up
The banks see that house prices increase
continuously, so they have no fear of lending more
than they traditionally have done.
And the more house buyers borrow, the higher
they drive the prices

Lehman Brothers (Investment bank) was technically
bankrupt weeks before they informed bankruptcy court
They had cooked the books (= creative accounting)
to conceal it
That would normally mean 10 to 15 years in jail for those
responsible, but their auditors, Ernest & Young, had
approved the cooking
Those who bought shares in Lehman brothers in the
weeks in question sued Ernest & Young
(Remember Shell reclassification of reserves 2004)
(Also, Enrons auditors, Arthur Andersen, collapsed
because they were sued by angry Enron shareholders)

Rotten loans triggered the crisis, as houses were put on
the market with few buyers
American banks had made packages of their house loans
and sold to banks and investors abroad
as they had with risky and complex financial instuments,
the investors being municipalities with high revenues from
power production, who even borrowed to invest more

Should governments be lenders of last resort
(bail out banks and industry) ??
It is extemely important that banks have trust
from depositors as well as from other banks
This also relates to companies insuring debts for
the banks (AIG)
But will not low interest from the national bank be
the start of another crisis later on ?
and is not government help to manufacturing industry
(General Motors) unfair because it is distorting
competition and keeeping alive obsolete production ?
Ford chose not to receive help. GM has repaid what
they borrowed.
PETROLEUM ECONOMICS
2015
Deflation
Deflation is when prices go down
(negative inflation)
This is a fact within the Euro-area in 2015
23 European countries have negative
inflation as of March 2015
It is a symptom of the economy
developing poorly
Economists would like to to have a pull
in the economy, like 2 pct inflation
Deflation
PETROLEUM ECONOMICS
2015
Why deflation now ?

Contiuously lower (or steady) prices for
Electronic appliances
Textiles (clothing)
Oil price down
Price of gasoline and diesel
Cost of transportation makes other
products cheaper
Cost of oil based input makes other
products cheaper
Deflation
PETROLEUM ECONOMICS
2015
Why deflation now ?

As there is free capacity in production,
increased production does not create inflation
Unemployment means that there is no
pressure upwards as for wages
The service sector relies much less on energy
Service sector prices are still rising
PETROLEUM ECONOMICS
2015
Deflation
Is it only bad ?
People have more to spend
The boost to purchasing power from a
short period of falling prices is welcome
But:
Durable goods suffer, because people
postpone their purchases
Investment is low
Fewer new companies established
PETROLEUM ECONOMICS
2015
Deflation and Interest rates

Remember the link between inflation and
interest rate:
Current interest rate: i = (1 + i)(1 + f) - 1
With real interest at 2 %, inflation at -0.5%
current interest is 0.5 %
Real interest rate i = i - f
1+f
With current interest at -0.25, inflation at

-0.5 real interest is 0.5
Several European countries now have negative
interest rates, as has the European Central Bank
Note: Cash has current interest rate = 0
PETROLEUM ECONOMICS
2015
USA Quantitative Easing

USA has a flexible labor market, people move to
where the jobs are, and there are limited
welfare systems
In order to stimulate the economy, the
Federal Reserve has bought back government
securities (bonds): Quantitative Easing, QE
That means more money in circulation;
increased consumer spending and investment
Interest rates have gone down
PETROLEUM ECONOMICS
2015

The economy has been stimulated:
Unemployment is down from 10 to 5.6 %
295,000 new jobs in February
3 million new jobs last 12 months
Strong recovery for sale of durables (cars,
furniture, appliances etc)
Non-durable goods (food, clothes) are not
so volatile
The stock market is at all time high
(Dow Jones)
PETROLEUM ECONOMICS
2015
US New York Stock Exange
PETROLEUM ECONOMICS
2015

The Fed has reduced QE and said that they
will increase Fed interest rates later this year
This means demand for US dollars from
investors abroad (who hardly get any interest at
home), and the USD appreciates
Good for European exports !
But is it good for the future of America ?
Advanced-manufacturing jobs have dwindled
as a share of Americas total employment
PETROLEUM ECONOMICS
2015
Euro Area
In order to stimulate the economy, the
European Reserve Bank will buy back bonds (QE)
But from banks in which countries ?
Anyway, that will mean more EUROs in
circulation (lending from banks).
Lower (negative) interest rates
Strong USD means more European exports
but not so good for those with USD debt
The economy may be stimulated if consumers
have confidence and capitalists invest in
Europe, not abroad
PETROLEUM ECONOMICS
2015
EU Countries
Germany
Has made reforms in the labor market
Unemployment from 10 down to 6.5 %
Exports drive the economy
Huge current-account surplus
The economy may go even better if the
Germans could increase consumer
spending
So whats wrong with Greece ?

The government borrows money to a
great extent abroad (German banks)
The money is spent for unproductive
uses, like welfare spending, because that
makes politicians popular
Much is lost in corruption

Taxes are not collected, because
that would make politicians unpopular
and because ordinary people think that the money is
not spent as it should by the government

People do not pay taxes as they should
(black economy) - 2015 worse than ever
People elect politicians that do not push
tax collection
The government employs people in public jobs but
the need for these employees is hardly existant
Politicians please the people by maintaining low
retirement age
So, to pay for pensions and schools and hospitals
and police and so on and so forth

In Germany and Norway the retirement
age is moving upwards,
so 65-year old Germans and Norwegians
have to work to pay for Greek 60-year
old retired people who enjoy their coffee
at the local coffeeshop
And we have to still feed them loans to help
them staying afloat
And do you believe we are pleased ?
Greece exits the EURO Grexit ?

The first 9 months of 2014 there was albeit small growth in Greece.
Then the the politcal landscape began to change
A new parliamentary majority could form a government that might withdraw from
the Euro
People withdrew their banksavings in fear that they

would become Greek Drachme
So now the banks do no have funds to lend to

business for investment and trade credits and to
individuals for house building etc
Greece exits the EURO Grexit ?

Syriza won the election, but the Syriza-led
governmenthas not succeeded in their negotiations with
IMF: International Monetary Fund

The European Central Bank
The European Commission
Domestic invstors have put projects on hold.

Foreign investors have been scared away
And the economy shrinks again
How to Succeed in Business....

Some countries must get rich first in order that
there are companies which can invest abroad.
Deng Xiaoping:Some people have to get rich first
There is no way to get rich without foreign
investment
Deng Xiaopings visit to Singapore 1979
PETROLEUM ECONOMICS
2015
Dutch disease
According to a source on Google
The de-industrialization of a nation's economy that
occurs when the discovery of a natural resource
raises the value of that nation's currency,
making manufactured goods less competitive with
other nations, increasing imports and decreasing
exports.
The term originated in the Netherlands after the
discovery of North Sea gas.
PETROLEUM ECONOMICS
2015
Dutch disease
First symptoms are
sharp increase in petroleum revenues
increased wages and salaries
increase in welfare
a feeling of well-being and success
PETROLEUM ECONOMICS
2015
Dutch disease
Second phase of disease
Industries competing internationally have
too high costs to be competitive
Good job opportunities i petroleum sector
.. as well as in the public sector
and those not having jobs receive fat
cheques from the welfare system
PETROLEUM ECONOMICS
2015
Dutch disease
Third phase of disease
Reduced petroleum revenues due to
decline and/or lower prices for oil and gas
Increased unemployment
The government must borrow to pay for
extensive welfare
Depreciation of currency
High inflation
Disgruntled workers protest against lower
wages or layoffs
PETROLEUM ECONOMICS
2015
Dutch disease
Hopefully not that bad

National Economy 2015S

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National Economy 2015S

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PETROLEUM ECONOMICS

The National Economy

Economic growth can only be achieved when there is

Economic growth takes time

Economic growth requires that obsolete

and that any school-leaver or jobless person

PETROLEUM ECONOMICS 2015

The Purpose of Economic Activity

Value of consumption and investment in plant

PETROLEUM ECONOMICS 2015

The Purpose of Economic Activity

Added value: Best possible use of input

Added value can only make sense

PETROLEUM ECONOMICS 2015

The Purpose of Economic Activity

Who can save in substantial volume ?

Savings and Investment

Economic growth can only be achieved when there is

PETROLEUM ECONOMICS 2015

The Purpose of Economic Activity

Gross Domestic Product

PETROLEUM ECONOMICS 2015

The Purpose of Economic Activity

Gross Domestic Product

PETROLEUM ECONOMICS 2015

The Purpose of Economic Activity

Trade balance and Current account

Trade balance: Difference between payments for

PETROLEUM ECONOMICS 2015

The Purpose of Economic Activity

PETROLEUM ECONOMICS 2015

The Purpose of Economic Activity

Trade balance and Current account

All countries have the objective of a balanced or

PETROLEUM ECONOMICS 2015

The Purpose of Economic Activity

PETROLEUM ECONOMICS 2015

The Purpose of Economic Activity

PETROLEUM ECONOMICS 2015

PETROLEUM ECONOMICS 2015

The Big Mac Index

The Big Mac Index

Global Exchange Rates

PETROLEUM ECONOMICS 2015

PETROLEUM ECONOMICS 2015

Interdependencies in the National Economy

PETROLEUM ECONOMICS 2015

PETROLEUM ECONOMICS 2015

Higher interest rates are necessary to

The government (the national bank) will try

PETROLEUM ECONOMICS 2015

So when inflation goes up, interest rates

PETROLEUM ECONOMICS 2015

do you prefer pest or cholera ?

PETROLEUM ECONOMICS 2015

and this is what people answer:

PETROLEUM ECONOMICS 2015

Financial crisis - why ?

Meaning that the US owes lots of money to China

PETROLEUM ECONOMICS 2015

Imbalance in the Trade balance

US banks owe USD to Chinese