Global Warming and its Economic Risks

Benjamin Hulac looks into the impact of global warming on the economic side.

Climate change is the most severe global economic risk of 2016, the World Economic Forum said yesterday.

The nonprofit economic analysis institution, set to convene next week in Davos, Switzerland, for its yearly meeting, has labeled climate change or related environmental phenomena—extreme weather, major natural catastrophes, mounting greenhouse gas levels, water scarcity, flooding, storms and cyclones—among the top five most likely and significant economic threats the world faced in each of its annual reports since 2011.

The 2016 report, the latest installment of a report the WEF has published since 2007, marks the first time an environmental risk tops the rankings.

“Climate change is exacerbating more risks than ever before in terms of water crises, food shortages, constrained economic growth, weaker societal cohesion and increased security risks,” Cecilia Reyes, the chief risk officer of Zurich Insurance Group Ltd., one of the organizations that worked on the report, said in a statement.

The WEF document does not paint a sanguine picture.

North America’s eastern seaboard, East Asia, Southeast Asia and the South Pacific are particularly exposed to extreme weather patterns and natural catastrophes, according to the report—a survey conducted in the fall of 750 experts, who answered questions about 29 types of global risk, like cyberattacks, government instability and weapons of mass destruction.

Global climate change threatens top producers of wheat, corn, rice and other agricultural commodities, the report notes. Recent years illustrated the “climate vulnerability of G-20 [Group of 20] countries such as India, Russia and the United States—the breadbasket of the world.”

Hot, dry and tense
Climate change is compounding and amplifying other social, economic and humanitarian stresses globally. It is linked to mass and often forced migration; violent conflict between nations and regions; water crises; and, as the world population rises and simultaneously gets hotter, food shortages, the report reads.

“Forced displacement is already at an unprecedented level,” the authors continue, referring to emigration.

 

In this hotter, water-scarce future, tensions will likely grow between nations.

“Unless current water management practices change significantly, many parts of the world will therefore face growing competition for water between agriculture, energy, industry and cities,” the authors write.

 

A growing business awareness
Following the worldwide financial meltdown of 2008, the people WEF surveyed listed the collapse of investment prices as the most likely and most grave hazards. Yet that trend shifted.

“Environmental worries have been at the forefront in recent years,” the authors wrote, “reflecting a sense that climate change-related risks have moved from hypothetical to certain because insufficient action has been undertaken to address them.”

 

Paris ‘a starting point’
Economists, regulators and financial experts have become increasingly vocal about climate risks.

Governor of the Bank of England Mark Carney, in a September speech at Lloyd’s of London headquarters, said the warming climate could “bring potentially profound implications for insurers, financial stability and the economy.”

 

“It’s a risk that needs to be managed,” Bernhardt said. “The challenge, historically, is that it’s been treated as an uncertainty.”

Source: http://www.scientificamerican.com/article/top-economic-risk-of-2016-is-global-warming/

Oil Oversupply

National Commercial Bank looks at the impact of oversupply of oil.

Elevated production levels, decelerating demand, and record high inventories will suppress oil prices to an average of $50/bbl in 2016, the National Commercial Bank (NCB) said in its latest monthly “Views on Saudi Economic and Developments”.

It said growth dynamics pertaining to emerging markets, in particular China, and production factors relating to OPEC have underpinned the bearish view.

The lack of compliance among OPEC members that produced above the 30MMBD quota for the 18th month in a row will be an important drag, especially that the group lacks a unified front.

Saudi Arabia, Iraq and Iran are adamant in producing as much as they can. The Kingdom’s production peaked at 10.6 MMBD in June, while Iraq has increased output over the year by around 0.7 MMBD, reaching 4.2 MMBD in November. Additionally, lifting the sanctions imposed in July 2012 on Iran is expected to bring an additional 500 thousand barrels a day during 1H2016, which will keep OPEC’s production above the 32 MMBD mark. Even though non-OPEC members and high-cost producers will continue to be pressured this year, the anticipated decline in their production will not offset OPEC’s over quota strategy. The IEA, EIA and OPEC have forecasted a decline in non-OPEC supply between 400-600,000 barrels a day, the first annual decrease since 2008, largely due to the steeper decline in US shale production.

The EIA predicted in its latest report that companies operating in US shale formations will reduce production by a record 570,000 barrels a day, which underscores the challenging environment even after slashing capital spending, laying off workers and focusing on the most productive areas.

On the demand side, China is expected to have the weakest economic performance since 1990, with growth falling below 7% for 2015 and 2016 despite the myriad attempts to reduce interest rates, reserve requirements and devalue the yuan in order to spur business activity.

Furthermore, emerging markets are expected to expand at 4%, the slowest pace since 2010 and well below their 10-year average of 7%. Generally, the three eminent organizations are forecasting oil demand to rise between 1.2 and 1.4 MMBD in 2016, much slower than last year that saw demand grow by as much as 1.8 MMBD, a five-year high.

The record US and global crude oil inventories will also continue to weigh on oil markets. The end of year US crude oil inventory at 487.4 MMbbls is 27% more than the level recorded in 2014, which was 388 MMbbls, and is also at an 80-year high for this time of year.

Additionally, the OECD’s commercial total oil inventories rose to around 2.971 billion barrels, near a record level that is equivalent to 60 days of consumption and above the five-year average. Given these aforementioned dynamics, NCB forecast the market to remain unbalanced in 2016.

Source: Saudi Gazette