After several years, several months, several weeks and several days of crisis, it looks like things are about to come to a head for Greece and its banks. It becomes easier to understand exactly what GREXIT may mean for the Greek people. What happens when the banks and the government completely run out of money?
Greece has some indigenous coal production (lignite) but no oil or gas to speak of which means that all oil and gas are imported (Figure 1). This is linked to a structural trade deficit that contributes to the country’s dependency on debt. If Greece runs out of Euros, will it be able to buy oil and gas on the international markets? Greece held 90 days of oil stocks in 2010 [2]. Once that is gone then the tourist industry may collapse?
Figure 1 The chart shows the difference between oil, gas and coal production and consumption figures providing a proxy for imports as reported by BP 2015 [1].
The improving state of energy balance (Figure 1) may appear to be a positive sign but it in fact reflects a steep fall in energy consumption (Figure 2) – a good thing? Well it would be good if the Greeks had suddenly become more efficient, but that is not the case. The decline in energy consumption is directly linked to austerity and depression that has now lasted for 8 years (Figure 3) – no wonder the Greek people want a change.
Figure 2 Energy production data for Greece as reported by BP 2015 [1]. Electricity production is based on indigenous coal (lignite), hydro, wind and gas imported from either Russia or Algeria. Crude oil is imported and refined in Greece [IEA 2] and is used mainly in the transport sector that is dominated by tourism. The decline in energy consumption is directly linked to economic decline (Figure 3).
Figure 3 Since the early 1990s, energy consumption and GDP are closely correlated in Greece. The per capita energy figures will be distorted by the large numbers of tourists that visit Greece each year. The World Bank reports 18 million visitors in 2013.
Figure 4 The only indigenous energy production in Greece worth speaking of is coal. The country has some hydro that may come in useful for balancing intermittent wind. Related: Now Is A Good Time To Pick Up Some Oil Stocks
One of Greece’s many problems is that it is energy poor. Some indigenous coal augmented by hydro and new renewables (wind and solar) takes care of 60% of the country’s electricity generation (Figures 4, 5). The other 40% comes from imported oil and gas. Should Greece run out of money the lights may go out.
Figure 5 Electricity generation vital statistics from the IEA [2].
Figure 6 Electricity generation mix from the IEA [2]. At the encouragement of the IEA, indigenous coal is being replaced by imported gas. It seems possible that European / OECD climate policy has contributed to Greece’s downfall.
The electricity statistics are lifted from an interesting IEA report on energy policy in Greece [2]. The IEA is trying to encourage Greece to expand variable renewable electricity generation and recognises that Greece should have more flexible gas generating capacity to balance its grid. The IEA policy therefore is for Greece to reduce its dependence on cheap indigenous lignite and to replace this with expensive renewables and imported gas. With friends like the IEA, who needs enemies?
Figure 7 Greek energy consumption is dominated by oil that is used in the transport sector and in power generation. The latter probably represents oil / diesel fired generators on Greece’s many islands.
Greece is heavily dependent upon oil in its energy mix. For example oil is 36% of the total in Germany compared with 54% in Greece. Heavy dependency on expensive imported oil is naturally bad for any economy. So why does Greece not produce its own oil and gas?
Rumors abound of untold oil and gas riches, if only the Greeks could be bothered helping themselves to them.
If you’ve been watching Greece’s recent energy push lately, it’s been difficult not to get too excited about the country’s potential. From political commentators to [former] Prime Minister Antonis Samaras himself, the message has been enthusiastic and clear – Greece is home to billions of barrels of oil, trillions of cubic meters of gas and most importantly for a country saddled with the longest recession in modern history, billions in potential revenue. [Forbes 3].
As far as I am aware this is simple propaganda and hype designed to try and talk Greece out of recession.
Figure 8 A Fantasy map of gas fields off the Island of Crete [4]. As far as I am aware no seismic has been shot and no wells drilled. Oil and gas prospectivity in the Mediterranean lies along the N African coast. The African continent is being subducted beneath Eurasia. The overlying Eurasian continent, where Greece lies, is being heavily deformed by tectonic forces that provide very poor prospectivity for oil and gas. Related: The Next Fracking Boom May Be Closer Than You Think
Figure 9The Alpine – Himalayan collision zone of which Greece is a part [5]. In Iran and Kurdistan significant oil deposits do lie within the Zagros fold belt and there is some oil in the southern Appenines of Italy. So one can never say never. But to claim that Greece has vast oil and gas deposits without drilling any wells and establishing a working petroleum system is pure fantasy.
A map like the one shown in Figure 8 is simply dreamt up by optimists. The Mediterranean Sea is formed by a subduction zone where N Africa is being pushed beneath Europe leading to the Alps, volcanic activity in Italy (active) and Greece (dormant). Most of the oil and gas deposits of the region lie in the leading edge of the African continent that has not yet been subducted. This includes the E Mediterranean gas fields off shore Israel / Palestine. Simply making up a story based on hope, drawing a few ovals on a map south of Crete and claiming billions of barrels reserves is not how oil and gas is formed or found.
Figure 10 Vital demographic and economic statistics for Greece from the IEA [2].
With a population of 11.3 million, Greece is a very small European country with below average income. The depression has seen unemployment soar to 27%, though it is now falling slowly.
Figure 11 This chart cross plots the data shown in Figure 3 and shows how energy is required to generate GDP. Greek per capita GDP peaked in 2007 and has declined to the present day. In a sense Greece is living in a post-peak world and we may get a sense of how dreadful things might become if the Greeks do not bow to the pressure of their creditors and are ejected from the Euro zone.
Per capita GDP peaked at €24,000 in 2007 and has since fallen 25% to €18,000. One can surmise that the incomes of many of those in work will not have fallen this amount and that falling per capita GDP reflects the rise in unemployment rate.
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Figure 12 The preferred version of this chart used GDP PPP from the World Bank. But unfortunately they have changed their reporting format and the data tables I was using are no longer available. While Greece is poor in a European context it is still a wealthy country compared with many others around the world. Greece and Portugal currently have similar levels of per capita GDP and energy consumption. Portugal is not in the same mess because they have managed to keep their debt levels under control, only just (Figure 13). Related: OPEC Still Holds All The Cards In Oil Price Game
Of course the main problem for Greece is its debt. Since 1970 the country has not run a trade surplus (Figure 13). Foreign tourists flock to Greece and rent imported cars that run on imported oil. The cumulative trade deficit in $US current is 494 billion.
Figure 13 Greece has a long-term structural trade deficit that links to its structural debt. If you spend more than you earn you must borrow to make up the difference. The deficit has been substantially reduced in recent years more through depression than through prudence. One can but anticipate that it would rise again with economic growth. This raises the question of whether it is possible for an economy like Greece to exist within the € zone?
With GDP of $254 billion and debt to GDP ratio of 164% the debt pile of $417 billion reflects the trade deficit over the decades. Tourism may provide employment and boost olive, yoghurt, tomato and ouzo sales, but the economic model seems fatally flawed when Airbus, Rolls Royce, Volkswagen and Total are the main benefactors of the industry.
Figure 14 Government debt levels of 10 selected European countries [7]. Greece and Italy have historically run debt at over 100% of GDP. An additional problem for Greece is that much of the debt is held by foreign banks and institutions. Japan, for example, has even higher debt levels than Greece, but much of this is borrowed from the Japanese people. The situation in the UK will be similar. I have heard talk that the Greek government may raid savers deposits. Surely a better tactic would be to issue bonds where those Greeks with money are obliged to buy.
Greece is not the only country with debt woes. But it should be clear why it is in crisis. Looking at the picture since 1995 there are three groups of countries (see Figure 14). Italy and Greece have always run with high debt : GDP, its just that in Greece this has got out of control with the collapse of GDP and depression. Four other European countries are at risk with debt : GDP at or over 100%. These are the UK, Portugal, Ireland and France. George Osborne intends to set a different course for the UK on 8th July. Bankrupt France wants to bail out Greece. Four of these countries have their finances well under control – Norway, Czech Republic, Germany and Spain.
A few years ago I heard a talk by Russel Napier. Greece was high on the agenda then. He explained how things used to work. Greece would hit an economic downturn. The Drachma would devalue making Greece the cheapest, sunny destination in Europe. Germans would flock there and give the Greeks Deutschmarks and in return they got a holiday and loads of ouzo to drink. Today the Germans simply give Euros to the Greeks and it seems they have grown tired of doing so.
References
[1] BP: Statistical Review of World Energy 2015
[2] IEA: Energy Policies of IEA Countries: Greece (large pdf)
[3] Forbes: How Real Is Greece’s Oil And Gas Future?
[4] Deepresource: Let Greece Pay With Oil
[5] AGU: Greece segment of the North Anatolian Fault
[6] UN: UN: National Accounts Main Aggregates Database
[7] The World Bank
By Euan Mearns
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