Monetary policy has run its course

It has made secular stagnation worse. Fiscal alternatives look a safer bet

Martin Wolf

Why are interest rates so low? Does the hypothesis of “secular stagnation” help explain it? What do such low interest rates imply for the likely effectiveness of monetary policy during another recession? What other policies might need to be tried, either as an alternative to monetary policy or a way to make it more effective? These are the most important questions in macroeconomics. They are also hugely contentious.

A recent paper by Lukasz Rachel and Lawrence Summers shines light on these questions. Its thrust is to support and elaborate the hypothesis of “secular stagnation”, revived by Prof Summers as relevant to our era in 2015. This paper’s principal innovation is to treat the big advanced economies as a single bloc. Here are four conclusions.

First, a dramatic and progressive decline in real interest rates on safe assets has occurred, from over 4 per cent in the 1980s to around zero now. Furthermore, shifts in risk preferences do not explain this decline, since spreads in yields of riskier over safe assets have changed little. (See charts.)

Second, this secular fall in real interest rates implies a roughly equivalent fall in the (unobservable) “neutral” or “equilibrium” rate — the rate at which demand matches potential supply.

Third, governments are not generating this structural weakness in demand. On the contrary, by expanding social spending, deficits and debt, governments have raised equilibrium long-term real interest rates, other things being equal.

Finally, changes in the private sector would, on their own, have generated a fall of more than seven percentage points in the equilibrium real rate of interest. Among the many factors driving this sharp decline must have been ageing; declining productivity growth; rising inequality; declining competition; and falling prices of investment goods.

The authors conclude that the hypothesis of “secular stagnation” in the high-income economies — chronically weak demand, relative to potential output — is highly credible. After all, they write, “prior to the financial crisis, negative real short-term interest rates, a huge housing bubble, erosion of credit standards and expansionary fiscal policy were only sufficient to achieve moderate growth. Adequate growth in Europe was only maintained through what in retrospect appears to have been clearly unsustainable lending to the periphery.”

This analysis has big implications now. When recessions hit, real short-term interest rates need to fall sharply and the yield curve (which shows the rates on bonds of varying maturities) needs to become strongly upward sloping if monetary policy is to stabilise the economy. Suppose, then, that our economies were to fall into a deep recession, yet still have near zero real interest rates and very low nominal rates, too.

Suppose, too, that, inflation were somewhere between zero and two per cent. Then the response to a recession would require strongly negative short-term nominal interest rates, possibly as low as minus 5 per cent. That would, to put it mildly, create a wasps’ nest of technical, financial and political problems.

This analysis implies that central banks are not creating low real interest rates, as critics charge, but delivering the low real rates the economy needs. A paper by Claudio Borio and others at the Bank for International Settlements takes precisely the opposite point of view: this argues that monetary regimes set real interest rates, even in the long run — a position that contradicts standard views on the need to separate monetary from real processes in economics.

This seems hard to accept, in general. But it is highly relevant in a critical respect: this is that interest rates play a big part in driving credit cycles. Indeed, that is how monetary policy normally works. If the central bank wants to raise inflation in an economy with structurally weak demand, it will do so by encouraging the growth of credit and debt. It might then fail to raise inflation, but create a debt crisis. That is deflationary, not inflationary.

Thus, the pre-crisis monetary policy, aimed at raising inflation, has now created the opposite: a deflationary debt overhang that works via what Richard Koo of Nomura calls “balance-sheet deflation”. That in turn leads to still lower nominal (and real) rates. Thus, the financial mechanisms used to manage secular stagnation exacerbate it.

We need more policy instruments. The obvious one is fiscal policy. If private demand is structurally weak, the government needs to fill the gap. Fortunately, low interest rates make deficits more sustainable. According to recent papers by Olivier Blanchard, former chief economist at the IMF, and Jason Furman, former chairman of the US council of economic advisers, together with Prof Summers, this combination is not just true now, but has been true in the past. That makes fiscal policy a far safer bet.

It is of course essential to ask how best to use those deficits productively. If the private sector does not wish to invest, the government should decide to do so. But it can also improve the private incentive to invest. The world needs to make huge investments in new energy systems: a mixture of public and private investment is clearly the best response.

The credibility of the “secular stagnation” thesis and our unhappy experience with the impact of monetary policy prove that we have come to rely far too heavily on central banks. But they cannot manage secular stagnation successfully. If anything, they make the problem worse, in the long run. We need other instruments. Fiscal policy is the place to start.

Market Concentration Is Threatening the US Economy

Rising inequality and slow growth are widely recognized as key factors behind the spread of public discontent in advanced economies, particularly in the United States. But these problems are themselves symptoms of an underlying malady that the US political system may be unable to address.

Joseph E. Stiglitz

NEW YORK – The world’s advanced economies are suffering from a number of deep-seated problems. In the United States, in particular, inequality is at its highest since 1928, and GDP growth remains woefully tepid compared to the decades after World War II.

After promising annual growth of “4, 5, and even 6%,” US President Donald Trump and his congressional Republican enablers have delivered only unprecedented deficits. According to the Congressional Budget Office’s latest projections, the federal budget deficit will reach $900 billion this year, and will surpass the $1 trillion mark every year after 2021. And yet, the sugar high induced by the latest deficit increase is already fading, with the International Monetary Fund forecasting US growth of 2.5% in 2019 and 1.8% in 2020, down from 2.9% in 2018.

Many factors are contributing to the US economy’s low-growth/high-inequality problem. Trump and the Republicans’ poorly designed tax “reform” has exacerbated existing deficiencies in the tax code, funneling even more income to the highest earners. At the same time, globalization continues to be poorly managed, and financial markets continue to be geared toward extracting profits (rent-seeking, in economists’ parlance), rather than providing useful services.

But an even deeper and more fundamental problem is the growing concentration of market power, which allows dominant firms to exploit their customers and squeeze their employees, whose own bargaining power and legal protections are being weakened. CEOs and senior executives are increasingly extracting higher pay for themselves at the expense of workers and investment.

For example, US corporate executives made sure that the vast majority of the benefits from the tax cut went into dividends and stock buybacks, which exceeded a record-breaking $1.1 trillion in 2018. Buybacks raised share prices and boosted the earnings-per-share ratio, on which many executives’ compensation is based. Meanwhile, at 13.7% of GDP, annual investment remained weak, while many corporate pensions went underfunded.

Evidence of rising market power can be found almost anywhere one looks. Large markups are contributing to high corporate profits. In sector after sector, from little things like cat food to big things like telecoms, cable providers, airlines, and technology platforms, a few firms now dominate 75-90% of the market, if not more; and the problem is even more pronounced at the level of local markets.

As corporate behemoths’ market power has increased, so, too, has their ability to influence America’s money-driven politics. And as the system has become more rigged in business’s favor, it has become much harder for ordinary citizens to seek redress for mistreatment or abuse. A perfect example of this is the spread of arbitration clauses in labor contracts and user agreements, which allow corporations to settle disputes with employees and customers through a sympathetic mediator, rather than in court.

Multiple forces are driving the increase in market power. One is the growth of sectors with large network effects, where a single firm – like Google or Facebook – can easily dominate. Another is the prevailing attitude among business leaders, who have come to assume that market power is the only way to ensure durable profits. As the venture capitalist Peter Thiel famously put it, “competition is for losers.”

Some US business leaders have shown real ingenuity in creating market barriers to prevent any kind of meaningful competition, aided by lax enforcement of existing competition laws and the failure to update those laws for the twenty-first-century economy. As a result, the share of new firms in the US is declining.

None of this bodes well for the US economy. Rising inequality implies falling aggregate demand, because those at the top of the wealth distribution tend to consume a smaller share of their income than those of more modest means.

Moreover, on the supply side, market power weakens incentives to invest and innovate. Firms know that if they produce more, they will have to lower their prices. This is why investment remains weak, despite corporate America’s record profits and trillions of dollars of cash reserves. And besides, why bother producing anything of value when you can use your political power to extract more rents through market exploitation? Political investments in getting lower taxes yield far higher returns than real investments in plant and equipment.

Making matters worse, America’s low tax-to-GDP ratio – just 27.1% even before the Trump tax cut – means a dearth of money for investment in the infrastructure, education, health care, and basic research needed to ensure future growth. These are the supply-side measures that actually do “trickle down” to everyone.

The policies for combating economically damaging power imbalances are straightforward. Over the past half-century, Chicago School economists, acting on the assumption that markets are generally competitive, narrowed the focus of competition policy solely to economic efficiency, rather than broader concerns about power and inequality. The irony is that this assumption became dominant in policymaking circles just when economists were beginning to reveal its flaws. The development of game theory and new models of imperfect and asymmetric information laid bare the profound limitations of the competition model.

The law needs to catch up. Anti-competitive practices should be illegal, period. And beyond that, there are a host of other changes needed to modernize US antitrust legislation. Americans’ need the same resolve in fighting for competition that their corporations have shown in fighting against it.

The challenge, as always, is political. But with US corporations having amassed so much power, there is reason to doubt that the American political system is up to the task of reform. Add to that the globalization of corporate power and the orgy of deregulation and crony capitalism under Trump, and it is clear that Europe will have to take the lead.

Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University and Chief Economist at the Roosevelt Institute. His latest book, People, Power, and Profits: Progressive Capitalism for an Age of Discontent, will be published in April.

European banks

Fixing Europe’s zombie banks

How to deal with poor performance, defeatism and complacency

IS THERE ANY more miserable spectacle in global business than that of Europe’s lenders? A decade after the crisis they are stumbling around in a fog of bad performance, defeatism and complacency. European bank shares have sunk by 22% in the past 12 months. Deutsche Bank and Commerzbank are conducting merger talks with all the skill and clarity of purpose of Britain’s Brexit negotiators. Two Nordic lenders, Danske Bank and Swedbank, are embroiled in a giant money-laundering scandal. The industry makes a puny return on equity of 6.5% and investors think it is worth less than its liquidation value. Amazingly, many European banks and regulators are resigned to this state of affairs. In fact it is a danger to investors and to Europe’s faltering economy.

The banks make two excuses, both of which are largely rubbish. One is that it is not their fault. Unlike America, where banks have a return on equity of 12%, Europe does not have strongly positive government-bond yields, or a pool of investment-banking profits like that on Wall Street, or a vast, integrated home market. All this is true, but European banks have been lamentably slow at cutting their costs, something which is well within their control. As a rough rule of thumb, efficient banks report cost-to-income ratios below 50%. Yet almost three-quarters of European lenders have ratios above 60%. Redundant property inefficient technology and bloated executive perks are the order of the day.

The banks’ second excuse is that their lousy profitability does not really matter. Their capital buffers have been boosted, they argue, so why should regulators and taxpayers care about the bottom line? And shareholders, the banks hint, have learned to live with the idea that European lenders are unable to make a return of 10%, the hurdle rate investors demand from American banks and most other sectors.

This is bunkum, too. Profits do matter. They make banks safer: they can be used to absorb bad-debt costs or rebuild capital buffers when recession strikes. Depressed valuations show that far from tolerating European banks, most investors eschew them. As a result many lenders, including Deutsche, have too few blue-chip long-term institutional shareholders who are prepared to hold serially incompetent managers to account. And when the next downturn comes and banks need to raise capital, which investor would be foolish enough to give even more money to firms that do not regard allocating resources profitably as one of their responsibilities?

Rather than accept this miserable situation, European banks need to do two things. First, embrace an efficiency and digitisation drive. Costs are falling at an annual rate of about 4%, according to analysts at UBS. This is not enough. As consumers switch to banking on their phones there are big opportunities to cut legacy IT spending and back-office and branch expenses. Lloyds, in Britain, has cut its cost-income ratio to 49% and expects to get to close to 40% by 2020. The digital German arm of ING, a Dutch bank, boasts a return on equity of over 20% in a country that is supposedly a bankers’ graveyard. If other banks do not do this they will soon find that they have lost market share to new digital finance and payments competitors—both fintech firms and the Silicon Valley giants such as Amazon—that can operate with a fraction of their costs and which treat customers better.

Second, banks need to push for consolidation. The evidence from America and Asia suggests that scale is becoming a bigger advantage in banking than ever before, allowing the huge investments in technology platforms and data-analysis to take place. Europe has too many lenders—48 firms are considered important enough to be subject to regular “stress tests”. The banks complain that the reason for this is that Europe has not harmonised its rules and regulations. But this is only half the story. Most big banks are loth to cede their independence, and their bosses love the status that comes with running a big lender. And banks’ failure to get their own houses in order means that investors doubt that managers can handle integrating two big firms.

European banks face two paths. The one they are on promises financial and economic instability when the next recession strikes, and long-term decline. The other path is to get fit for the digital age and subject themselves to the financial disciplines that American banks, and almost all other industries, accept as a fact of life. It should not be a hard decision. 

Fintech: What’s Real, and What’s Hype

Wharton's Itay Goldstein and Andrew Karolyi from Cornell discuss a new research intitiative that aims to clarify where the actual promise lies regarding fintech.

Three years ago, the editors at a top academic journal in finance were concerned. A lot of venture capital was flowing into fintech, or financial technology, but there wasn’t much research about the topic coming from academics, who are known for their rigorous testing and analysis. So they decided to adopt a new editorial protocol to encourage more research: They would accept a paper regardless of the final results, taking pressure off the researchers to have conclusive findings. Of course, proposals for papers have to pass tough scrutiny first to get pre-accepted.

It worked. The Review of Financial Studies received 156 proposals from 409 authors representing 183 universities and 22 research organizations or government agencies. They came from more than 20 countries, and nearly half were from outside North America. The top nations outside of the U.S. were China, Germany, U.K., Australia, Canada and India. The editors ultimately chose 10 proposals, which fell into three categories: blockchain, financial services and big data. The papers will be featured in the Review’s May edition.

“Fintech is really a group of technologies that have been emerging in recent years and potentially are going to completely reshape the finance industry,” said Itay Goldstein, Wharton finance professor and executive editor of the Review, on the Knowledge@Wharton show on SiriusXM. “What is unique about the current fintech revolution is that a lot of these technologies are happening outside of the traditional finance sector.”  
For decades, financial innovations such as ATMs and wire transfers largely came from the financial institutions themselves. But with the advent of connected mobile devices and consumers’ increased comfort in transacting business by cell phone, non-financial companies are getting into the game, such as tech giants and startups. They are offering mobile payments, money transfers, peer-to-peer loans, crowdfunding, blockchain, cryptocurrencies, robo-investing and other services, according to the Review.
With billions of dollars being pumped into fintech, it was thus surprising to the editors of the Review that there weren’t more academics looking into it. “We were absolutely struck by the fact that there was such a dearth of research,” said Andrew Karolyi, deputy dean and dean of academic affairs at Cornell SC Johnson College of Business and a former executive editor of the Review, who joined Goldstein on the radio show. “We felt like we needed to do something to stoke [interest].”

Their novel endeavor generated a deluge of proposals, and the final 10 chosen were notable for some surprising findings. Researchers, for example, tracked in real time how much of bitcoin activity was actually illegal. Two papers identified the biggest weakness of blockchain; one scrutinized robo-advisors to see if they really improved performance of investors’ portfolios. Yet another paper looked at fintech startups: Did they serve the unbanked as was expected by consumers and regulators?

According to one paper, about 46% of bitcoin activity is illegal. “That was a real eye-popper,” Karolyi said. “The amount of activity that may well be an illegal share is strikingly higher than we ever would have thought beforehand.” The paper is “Sex, drugs, and bitcoin: How much illegal activity is financed through cryptocurrencies?” by Sean Foley of the University of Sydney, Jonathan Karlsen of the University of Technology Sydney (UTS), and Talis Putnins of UTS, Stockholm School of Economics.

The researchers used a creative method to estimate the share of illegal bitcoin activity. According to Karolyi, they swept the dark web using machine learning and used a novel application of network cluster analysis to “link [illegal] activities in real time … to events happening in bitcoin.” However, it’s not new for criminals to exploit new technology, Goldstein pointed out. Banks have all their restrictions because of experience dealing with crime.

But the paper also said that illegal activity in bitcoin has declined with time, as the cryptocurrency becomes more mainstream. “Over time, it has decreased as a relative share” as bitcoin has become more popularly used in legal transactions, Goldstein said. Criminals also likely realized that “it’s not the ideal way to hide criminal activity. You have a permanent record on everything.”

Blockchain’s Biggest Flaw

While bitcoin got the early headlines, companies have been more excited about the technology underpinning it: blockchain. At its simplest, the blockchain is a ledger that validates and records transactions without a central authority in control. In finance, blockchains can be used for money transfers, instant payment and settlement of trades, asset transfers, and others. Every user has a copy of the complete record and records cannot be changed because of the way transactions are linked in blocks. The belief is these features make blockchain secure and efficient.

But that’s not always true, according to two papers that will be published in the Review. “Forking [is] the biggest issue faced by blockchain applications,” according to an editorial written by Goldstein, Karolyi and Wei Jiang of Columbia University that will introduce the 10 fintech papers in their special issue. A famous case is the controversial fork executed on the Ethereum network that reversed a theft of $50 million in cryptocurrencies.

Forks are blockchains that diverge. Instead of one continuous chain of blocks, there are two or more. Forks can occur when software developers want to change the rules that validate a transaction. Because there is no way to change the previous blocks, they create a new branch of the blockchain that uses the new rules. It is like creating two sets of books using different accounting rules. Forks can be used to void a transaction.

Indeed, traders might try to fork the blockchain to void their losses, according to Jonathan Chiu of Bank of Canada and Thorsten Koeppl of Queen’s University in their paper, “Blockchain-based Settlement for Asset Trading.” To deter this behavior, they recommend having minimum trading volume, sufficiently strong preferences for speed and restricted risk positions.

Does Fintech Really Help the Unbanked?

One thing that excites regulators about fintech is its ability to reach people who have limited access to traditional financial services but possess mobile phones, such as rural populations. But three papers challenged that view. “Surprisingly … fintech lenders do not target borrowers with low access to traditional finance, suggesting that they are mostly competing with the traditional mortgage lenders rather than broadening access,” according to the Goldstein, Karolyi and Jiang editorial.

“It is a little disappointing,” Goldstein said. “One would hope that what fintech brings to the table is to expand the population that is being served.” However, Karolyi pointed out that the studies mainly looked at the U.S. landscape, where infrastructure for financial services is more mature and thus fintech has made less impact on the unbanked compared to emerging economies.

As such, Karolyi and Goldstein said more study needs to be done on whether fintech aids financial inclusion, specifically looking at cases abroad. “These issues are even more important in the world outside, particularly in less developed countries and emerging markets,” Karolyi said. “One of the big calls for future research is to really understand this — to push the frontiers to look for unique settings outside the U.S.”

Do Robo-advisors Work?

Another hot area of fintech is robo-advisory services, which are being offered to customers by many investment companies. These are computer programs that automatically set up, monitor and rebalance investors’ portfolios based on their goals, risk tolerance and other needs. They are less costly to run because work is being done by computers and they typically charge less, too. But do they actually improve investment performance?

Generally, the answer is yes, according “The Promises and Pitfalls of Robo-advising,” by Francesco D’Acunto of Boston College, Nagpurnanand Prabhala of Johns Hopkins University and Alberto Rossi of the University of Maryland. In their sample of investors in India, “most of them become better diversified and reduce portfolio volatility once they adopt robo-advising,” the editorial summary said. “Importantly, robo-advisory demonstrates a clear benefit in mitigating the most prominent behavioral biases, such as the disposition effect and momentum chasing.”

Disposition effect is the tendency of investors to sell assets that have risen in value and hold on to the losers. But this could hurt investment performance because assets rising in value tend to keep going up for a time and those that go down keep declining. Momentum chasing is another investor behavior that can be damaging to portfolios; it’s like buying high and selling low because one follows the crowd. Robo-advisors can mitigate both behaviors. But there is a big caveat: Successes or pitfalls of a robo-advisor largely depend on how well it is designed.

Looking ahead, Goldstein and Karolyi want to keep the fintech research pipeline robust. “The academic community has to continue to look into these issues and explore them, empirically and theoretically,” said Goldstein, adding he is encouraged that there is much more fintech research today. Karolyi believes their endeavor underscored the value of working across disciplines, such as finance scholars collaborating with computer scientists. It’s critical for academics to develop technology and financial expertise, Karolyi said, so as to “know how to push the frontier.”

US to match Saudi Arabia as biggest oil exporter on back of Texas shale boom

By Ambrose Evans-Pritchard

The US will rival Saudi Arabia as the world’s biggest exporter of oil products within five years as shale output achieves explosive growth, catapulting America into strategic dominance of the global energy system.

The International Energy Agency said US shale oil will make up 70pc of the extra global crude supply by 2024, eating into the market share of Opec and Russia.

America will add 4m barrels per day (bpd) of oil, mostly from the prolific Permian Basin in Texas. Total gross exports of crude and petroleum products will surge to 9m bpd.

“Annual gains will boost the US to levels never seen in any country, in excess of maximum capacity in both Russia and Saudi Arabia,” said the IEA in its five-year outlook for the oil markets.

This is an astonishing reversal of fortunes after the US energy crisis of 2008, when the US oil import bill was soaring to alarming levels and Washington rang the alarm bell on energy security.

The IEA’s director, Fatih Birol, said those who still think that US fracking is a flash in the pan are likely to be proved wrong.

“The second wave of the US shale revolution is coming. This will shake up international oil and gas trade flows, with profound implications for the geopolitics of energy,” he said.

The US broke all records last year, boosting output by 2.2m bpd. The country is already the world’s biggest producer at 12m bpd.

The IEA says digital technology and smart drilling have slashed the break-even cost for prime acreage in the Permian basin in Texas to $30 to $40 a barrel, with the best sites as low as $20. There are 5,000 wells already drilled - but not yet exploited - that could be activated quickly with little additional investment.
The Permian bonanza keeps growing. The US Geological Survey has upgraded the basin’s shale resources to 155 billion barrels, a rise of 35pc on estimates only a year ago. It is increasingly plausible that Permian will overtake Saudi Arabia’s giant Ghawar field.

Permian output exceeded pipeline capacity last year, leading to bottlenecks and jams of lorry tankers across west Texas. This caused an average discount of $7 on landlocked Permian crude and held back supply, but that chapter will soon close.

New pipelines are being built very quickly. The IEA said the Permian will have an extra 2.1m bpd of links to Gulf coast terminals by the end of the year, raising capacity to 5.6m bpd. This threatens to deliver a major supply shock to world markets.

Planned projects will boost the pipelines to more than 8m bpd by 2024 if they all go ahead. These are huge numbers: the entire crude exports of Russia and Saudi Arabia combined were 12.2m bpd last year.

The Opec-Russia alliance faces a Sisyphean task as it keeps having to cut output to stabilise oil prices, only to see US shale frackers snatching the prize each time.

Saudi Arabia is in an invidious position. It needs prices near $80 to balance the budget, paying for its cradle-to-grave welfare system and its military machine, but Brent is trading at just under $67.

Yet shale technology allows US drillers to respond quickly to shifting market conditions. They lock in futures contracts once US crude rises much above $55, and this in turn brings forward a surge of fresh supply.

It is now four-and-a-half years since Saudi Arabia flooded the global markets in a forlorn attempt to teach the US shale industry a lesson. The struggle has gone on as long as the First World War and has ended in stalemate. Prices have never regained the previous boom levels.

While debt markets have imposed tighter discipline on over-investment by small "wildcatters", the new twist is that ExxonMobil, Chevron, and other major companies have joined the Permian oil rush. They have deeper pockets and no such constraints.

For the time being, Opec is a diminishing force. Venezuela is no longer relevant to the world market. The IEA expects output to hold at 750,000 bpd - down from 3.4m at the start of the Chavez regime in 1999 - but warns that output may collapse altogether. Talk of rescues by China and Russia should be treated with a “degree of scepticism”.

Lost crude from Venezuela - as well as the 1.3m bpd of Iranian exports shut out by US sanctions - should have tightened the global market. Yet US fracking has overwhelmed everything. 

If the IEA’s broad outlook is right, Opec and Russia will have to live with a de facto "shale cap" on prices far out into the 2020s.

By then, the switch to electric vehicles (EV) will be coming into play. Norway's Government Pension Fund, the world’s biggest sovereign wealth fund, sent shivers through a few spines last week when it revealed plans to wind down $37bn of investments in oil companies as a precaution against permanently low crude prices.

The IEA says electric vehicles sales in China rose 61pc to 1.2 million last year. They are on track to reach a target of five million on the road by the end of 2020. Diminishing subsidies may hurt, but buyers have little choice: they cannot obtain a licence for a petrol car in the Eastern cities. Beijing issued just 6,460 plates for 2.8 million applicants in 2017.

Shenzhen has electrified its entire bus fleet and aims to achieve the same for taxis by next year. This is now a model for other Chinese cities.

The IEA estimates that Chinese oil demand growth will slip from 500,000 bpd a year to 160,000 bpd by 2024, and much of this will be for petrochemical plants for plastic. The trend implies oil demand in China will peak by the late 2020s.

Opec is still defiant. It insists that global oil demand will keep rising to fresh highs of 112m bpd by 2040 - a level that would make a mockery of the Paris climate agreement.

Yet the Saudis are hedging their bets. The state-oil giant Aramco revealed in London last month that it plans to "future-proof" itself over the next decade by switching at breakneck speed from transport fuel to petrochemicals.

“There is a worrying and growing belief among policy makers and regulators, investment houses, and NGOs, that we are an industry with little or no future,” said Aramco chief Amin Nasser.

The pincer movement of US shale on the one hand and electrification on the other is a nightmare coming true for Opec and Russia.