Wednesday, July 19, 2017

Global Carbon Pollution - Who is Responsible?

A recent publication by the environmental charity CDP looks at the role that corporations play in greenhouse gas emissions.  The Annual Carbon Majors Report for 2017 uses data from the Carbon Majors Database which was established in 2013 by Richard Heede of the Climate Accountability Institute.  The database shows us how carbon emissions are directed linked to a relatively small group of companies termed "Carbon Majors".  The report looks at both industrial carbon dioxide and methane emissions derived from fossil fuel producers in the past, present and future, providing investors and other interested parties to better understand the amount of carbon being released by key companies.

In its current form, the Carbon Majors Database consists of the following:

1.) data on 100 fossil fuel producers (the Carbon Majors) which includes 41 publicly traded companies, 16 private companies, 36 state owned companies and 7 state producers.  Whenever possible, the data used in this report data was supplied by corporate responses to the CDP Climate Change information request.   Other data came from estimates of emissions that are directly related to the emissions factor that is specific to the industrial activity (i.e. oil production, natural gas production etcetera).

2.) data on 923 gigatonnes of carbon-dioxide equivalent from direct operational and product-related carbon dioxide and methane emissions between the years of 1984 and 2015.  This data represents 52 percent of the global industrial greenhouse gases that have been released since the beginning of the industrial revolution in 1751. 

3.) data on a wider sampling of 224 companies which representing 72 percent of global industrial greenhouse gas emissions in 2015.

Here is a graphic showing the contribution of the three main fossil fuels to greenhouse gas production since 1988:

Since 1988, 833 gigatonnes of carbon dioxide-equivalent has been emitted compared to 820 gigatonnes in the 237 years between the beginning of the industrial revolution and 1988.  Coal is making up a larger share of fossil fuel production over the past 15 years, leading to an emissions intensity increase of 2.4 percent since 1988 despite the increase in the share of natural gas production, a lower carbon alternative.

With that background, let's take a closer look at the top 25 companies responsible for over half (51 percent) of global industrial greenhouse gas production by year going back to 1988:

In total, all 100 active major fossil fuel producers are responsible for 70.6 percent of global industrial greenhouse gas emissions.  The highest emitting companies since 1988 are as follows:

1.) Investor-owned - ExxonMobil, Shell, BP, Chevron, Peabody, Total and BHP Billiton.

2.) State-owned - Saudi Aramco, Gazprom, National Iranian Oil, Coal India, Pemex and CNPC (PetroChina).

One of the great contributors to the growth of greenhouse gas emissions is connected to the expansion of coal mining in China.  Since 2000, China's coal production has tripled to nearly 4 billion tonnes annually, nearly half of global coal output.  Half of China's coal production in 2015 came from 15 company groups with one-third of national coal production coming from 7 companies; Shenhua Group, Datong Coal Mine Group, China National Coal Group, Shandong Energy Group, Shaanxi Coal Chemical Industry, Shanxi Coking Coal Group and the Yankuang Group.

Here is a graphic showing the product mix for major oil and gas companies and their greenhouse gas emissions intensity:

For those of us who live in Canada, we can see that Suncor, Husky and Canadian Natural all fall high on the greenhouse gas emissions intensity scale, largely because of their oil sands operations, including both surface and in situ projects.  It is these unconventional oil projects that have higher greenhouse gas intensity than conventional crude oil and natural gas projects (i.e. higher carbon emissions on a per barrel of oil produced).

Let's close with this table which shows the top 50 companies in order of their cumulative industrial greenhouse gas emissions between the years 1988 and 2015:

The interesting data in this report will provide both the investing and non-investing public with an understanding of which global companies are responsible for the lion's share of carbon emissions.  Whether you believe that anthropogenic activities are leading to a changing global climate or not, it is interesting to see that a tiny fraction of the world's companies have long history of emitting pollutants that have the potential to create a much different world for the coming generations.  

Tuesday, July 18, 2017

The Growing Job Creation Conundrum in the United States

During the 2016 presidential election cycle, many of the key candidates touted their programs to create jobs for Americans, a promise that was particularly dominant in Donald Trump's campaign. In this posting, I want to look at a recent analysis by Ryan McMaken at the Mises Institute, a non-political, non-partisan institute that promotes teaching and research in the Austrian school of economics, looks at the of-cited line that the United States' economy has created millions upon millions of jobs since the last recession.  Here is a summary.

While total U.S. employment has risen from a low of 127.9 million workers in 2009 to its current level of 146.4 million workers in July 2017 as shown on this graph: you can see, 10.5 million of these jobs simply replaced the jobs lost during the Great Recession.  Prior to the Great Recession, the total number of non-farm jobs peaked at 138.4 million.  This means that, on a net basis, the past eight years of economic expansion have only created 8 million new jobs.  As well, we have to consider that the non-farm payroll numbers that are reported on a monthly basis are not reporting the number of "employed persons", rather, they are reporting the number of jobs.  This means that a single person that is holding down two part-time jobs to make ends meet still counts as two jobs.  As a result, while the total number of jobs may be increasing, the total number of employed persons may not be increasing.

Now, let's look at a graphic that shows the rate of non-farm payroll job creation for each economic cycle in the United States going back to the mid-1970s:

It's pretty clear that the economic expansion since the end of the Great Recession has experienced the lowest job growth rate of the past four decades.

The post-Great Recession job situation looks even worse when we compare the percentage growth in jobs between economic peaks to the percentage growth in the population of working age Americans as shown here:

And, to add fuel to the fire, the number of months that it has taken for the economy to recover the jobs lost during the latest recession far exceeds the time taken during the prior three recessions as shown on this graph:

After the 1981 - 1982 recession, it only took 33 months to recover the jobs lost.  In the recession of the early 1990s, it took 36 months and in the recession of the early 2000s, it only took 48 months.  This compares to the 78 months that it took during the post-Great Recession recovery.  Looking at the full recovery period (i.e. from the recession low to the recovery high), the numbers look even worse as you can see:

1.) 1981 to 1990 - by 1990, there were 18 million more jobs than the peak in 1981.

2.) 1990 to 2000 - by 2000, there were 22 million more jobs that the peak in 1990.

3.) 2000 to 2007 - by 2007, there were 6 million more jobs than the peak in 2000.

4.) 2007 to 2016 - by 2016, there were 8 million more jobs than the peak in 2007.

Keeping in mind that the economy is statistically overdue for a recession and that the global economy is weak at best, job creation may be near or at its post-Great Recession peak.

This analysis by Ryan McMaken suggests that the Trump Administration will find it very difficult to     create a significant number of new jobs.  The historical trends of the last four post-recession recoveries show just how difficult it will be to create a sufficient number of new jobs to keep American voters happy.

Monday, July 17, 2017

Janet Yellen on the Federal Debt

In Janet Yellen's most recent testimony before Congress, a little-covered comment gives us a sense of warning about where Washington's fiscal policies are leading us.  Here's the exchange:

Unfortunately, Ms. Yellen's comments are cut off before they are complete.  As such, here's the transcript of the exchange:

Mr. Steven Pearce (R - NM 2nd District):  I'm going though the Monetary Policy Report here and I'm going through your comments and I almost don't see anything about that number on the screen behind you that's just constantly rolling there and it's the debt .  Maybe it does not mean anything and sorta maybe it does.  Do you all ever talk about that in your committee?  Do you ever contemplate that in your position?

Ms. Yellen:  Well, I've discussed this previously with this committee and know there's....

Mr. Pearce:  I understand but we didn't get it in the report today as one of the driving factors and is something we ought to be thinking about.  So, how did it affect you all when Illinois was downgraded, their bond rating was downgraded the first of the year and they are paying what one analyst said is the highest differential in our history (Illinois bonds are currently rated at just above "junk status" - the current yield is 4.4 percent, 2.5 percentage points more than the yield on top-rated debt).  Now that's...the reason they are having to pay more and the bonds being downgraded is because they can't afford to pay the bills basically and if you hold their bond, you may not get paid.  If you went back to Detroit when it filed bankruptcy, bondholders only got 74 percent on the dollar.and so... and, I mean, it all feeds back toward this number here and the fact that it doesn't even make the print, not even the fine print that I could find, maybe I missed it but I did see the one sentence about Illinois being downgraded and there was brief discussion about Puerto Rico but the idea that we as a country are not discussing our ability to pay our bills is something that, I think there's a downside effect to the problem but the fact that your report doesn't bring it up is a little concerning to me.  And, the way that really played out was a couple of weeks ago when Chicago schools tried to issue a bond rating and they didn't get any bidders at all...none.  So, they ended up driving the rate up to seven, seven and a half, seven and three quarters or something (according to Bloomberg, the yield on Chicago school system variable rate bonds jumped to a maximum of 9 percent).  But it seems like that the people in charge of the financial stability of the country, the value of our dollar, the value of our promises to pay, it just seems like it would have little bit more importance in the document here.   I would expect, frankly, maybe a whole chapter because there are estimates that we cannot pay our bills in this country and so we continue to operate as if it's not going to matter if our ratings are downgraded.   If our interest rate goes up.  We're already running deficits which means we have to print the money every year in which to operate and it seems that the people in charge of the system would be talking about it and postulating and telling us "Hey, this is kind of serious.  Why don't we all work together and start figuring out what we can do to live within our means to just make sure that we're not paying  triple and quadruple what other people are paying for debt."  I'd love to hear your comments.

Ms. Yellen: Well, let me state in the strongest possible terms I agree that what you're showing here represents a trend that given current spending and taxation decisions is going to lead to an unsustainable debt situation with rising interest rates and declining investment in the United States that will further harm productivity growth and living standards.  I believe key thing that Congress should be taking into account in designing fiscal policy is the need to achieve sustainability of this debt path over time.  This is something I'm not just saying today but have been emphasizing for some time in my testimony.  (my bold)

You can find the remainder of Ms. Yellen's comments that are not included in the first video at the 52 minute 50 second mark here

Let's look at what has happened to the total federal debt since 1976:

Here is what has happened to the federal debt held by the public (marketable debt) since 1970:

This debt excludes the debt that the federal government owes to itself (i.e. intergovernmental debt that is owed to government departments - non-marketable debt)

Here is a graphic from the Treasury showing the amounts of both marketable and non-marketable debt effective June 30, 2017:

Here is a table showing annual federal government spending on interest payments going back to 1988 along with a breakdown of the interest expense on a monthly basis for the first nine months of fiscal 2017:

Notice how the interest owing on the federal debt  has not grown significantly over the past decade?  That's a direct result of this:

If we go back one decade to June 2007, a few months prior to the Federal Reserve's now long-term experiment with near-zero interest rates, we find this:

As Ms. Yellen noted, the U.S. government could find itself in an unsustainable debt situation.  With the current debt consisting of $14.363 trillion in marketable debt, a rise in interest rates from the current 2 percent to 5 percent (as shown in the examples above), interest owing on the marketable debt alone would rise from $287 million annually to $718 million.  If we add in the non-marketable (intragovernmental) which brings the total debt up to $19.845 trillion, the interest owing on the debt would rise from $389.7 billion to $992 billion or nearly one and a half times what the Pentagon proposes to spend in fiscal 2017.

While the U.S. dollar is the presently the global currency of choice, any number of factors could change this perception, including a war with Russia or China or both.  In large part, thanks to the beneficence of the Federal Reserve, Washington's power base is living in a false reality where overspending is never punished and ever-mounting levels of debt are considered a normal part of doing business.  We shall see.

One wonders - how does the braintrust at the Federal Reserve sleep at night given the fiscal mess that they are helping to create?  While Ms. Yellen may say that she's brought this to the attention of Congress in the past, her voice (and that of her predecessors at the helm of the Fed) have actually been quite silent when it comes to Washington and its unsustainable debt situation.  

Friday, July 14, 2017

Investing in the Global Oil and Gas Industry

The Fraser Institute's recent Global Petroleum Survey 2016, it's tenth annually survey of petroleum industry executives and other management, looks at a jurisdiction-by-jurisdiction analysis of barriers to investment in oil and gas exploration and production.  A total of 96 jurisdictions were included in this year's analysis, accounting for 75 percent of global oil and gas production and 66 percent of global oil and gas reserves.

Let's start by looking at the topics covered in the survey; respondents were asked to indicate how each factor influenced their company's decision to invest in various jurisdictions and were to rank each factor on whether the jurisdictions that they were familiar with encouraged investment, did no deter investment, mildly deterred investment, strongly deterred investment or whether their company would not invest due to this factor:

1.) Fiscal terms—including licenses, lease payments, royalties, other production taxes, and gross revenue charges, but not corporate and personal income taxes, capital gains taxes, or sales taxes.

2.) Taxation in general—the tax burden including personal, corporate, payroll, and capital taxes, and the complexity of tax compliance, but excluding petroleum exploration and production licenses and fees, land lease fees, and royalties.

3.) Environmental regulations—stability of regulations, consistency and timeliness of regulatory process.

4.) Regulatory enforcement—uncertainty regarding the administration, interpretation, stability, or enforcement of existing regulations.

5.) Cost of regulatory compliance—related to filing permit applications, participating in hearings, etc.

6.) Protected areas—uncertainty concerning what areas can be protected as wilderness or parks, marine life preserves, or archaeological sites.

7.) Trade barriers—tariff  and non-tariff  barriers to trade and restrictions on profit repatriation.

8.) Labor regulations and employment agreements—the impact of labor regulations, employment agreements, labor militancy or work disruptions, and local hiring requirements.

9.) Quality of infrastructure—includes access to roads, power availability, etc.

10.) Quality of geological database—includes quality, detail, and ease of access to geological information.

11.) Labor availability and skills—the supply and quality of labor, and the mobility that workers have to relocate.

12.) Disputed land claims—the uncertainty of unresolved claims made by aboriginals, other groups, or individuals.

13.) Political stability.

14.) Security—the physical safety of personnel and assets.

15.) Regulatory duplication.

16.) Legal system—legal processes that are fair, transparent, non-corrupt, efficiently administered, etc.

The responses were then used to calculate a Policy Perception Index (PPI) which is calculated using each jurisdictions average response to each survey question; jurisdictions that had less than five respondents for all sixteen factors were excluded from the rankings since their final score would not be as accurate.  The jurisdiction with the most attractive policies receives a score of 100 and the jurisdiction with the greatest investment barriers receives a score of 0. 

The Fraser Institute also divides the jurisdictions several ways.  First, let's look at the rankings of jurisdictions with large reserves which is defined as those jurisdictions that hold at least 1 percent of the sum of the proved hydrocarbon reserves of the 93 jurisdictions in the survey that have at least some proved hydrocarbon reserves:

Five of the jurisdictions in this ranking have PPI scores that put them in the top two quintiles (top 40 percent) and that two jurisdictions, Libya and Venezuela, have PPI scores that put them well into the bottom quintile.  Despite the fact that Russia has the largest proved ink reserves in the grouping, its PPI score of 39.21 shows that the oil industry deems it to have significant barriers to investment   It is interesting to note that Alberta, Canada's largest petroleum producing province, has slipped from 2nd place in 2014 and 3rd place in 2015. 

Second, here is a ranking of jurisdictions with medium/modest hydrocarbon reserves which is defined as those jurisdictions that hold at least 0.1 percent but less than 1 percent of the proved reserves of the 93 jurisdictions in the survey:

Ten jurisdictions in this grouping fall into the top quintile including three European nations, Norway, the Netherlands and the United Kingdom, and six states.  No jurisdictions fall into the bottom quintile, however, four jurisdictions fall into the fourth quintile including Ukraine, Ecuador, California and Bolivia.

Lastly, let's look at the Policy Perception Index scores in order from greatest to lowest without regard to the size of each jurisdictions' hydrocarbon reserves:

Of the top ten highest scoring jurisdictions, all but one was located in Canada or the United States.  Of the bottom ten lowest scoring jurisdictions, two were in Canada, three were in South America, one was in the United States, one in Africa, one in Australia and the remaining two were Russia and Ukraine.  As far as quintiles go, it is interesting to note that the the majority of the proved hydrocarbon reserves in the 96 nation study are located in nations with PPI scores that fall in the bottom two quintiles (bottom 40 percent).

As far as American jurisdictions go, Oklahoma, Texas, Kansas, Wyoming and North Dakota fall into the top five positions while California, Colorado, Michigan, Alaska and Illinois fall into the bottom five positions.

As far as Canadian jurisdictions go, Saskatchewan, Manitoba and Newfoundland and Labrador fall into the top three positions while Quebec, New Brunswick and the Yukon fall into the bottom three positions.  Interestingly, Canada's most prolific hydrocarbon producing province, Alberta, is right in the middle of the entire pack, coming in 43rd place out of 96 jurisdictions and British Columbia, the site of much of Canada's fracked reserves comes in 39th place overall.

As far as Middle East jurisdictions go, the United Arab Emirates and Qatar fall into the top two positions while Yemen and Iraq fall into the bottom two positions.

As far as African jurisdictions go, Morocco, Namibia and South Africa fall in the top three positions while Libya, Nigeria and Tunisia fall into the bottom three positions. 

Overall, the 2016 analysis of barriers to investment by the petroleum industry shows that industry executives are increasingly expressing negative sentiment about key factors that drive investment.    The United States remains as the most investor-friendly environment while Russia and Venezuela with their massive hydrocarbon reserves remain among the least investor-friendly jurisdictions.  Canada's fall to third place overall reflects the deterioration of Alberta as an investment target, a situation that is certain to put pressure on Alberta's current New Democrat government prior to the next provincial election.