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Re-published from Oilprice.com

Kenyan Oil, Hot and Getting Hotter: Interview with Taipan's Maxwell Birley

Kenya has become the hottest oil and gas venue in East Africa since big discoveries were made in the country's virgin oilfields last April. All eyes are on Kenya in 2013 to see how quickly--and economically they can develop those discoveries into production.

Nairobi based Taipan Resources Inc. (TPN-TSXV; TAIPF-PINK) is the 4th largest acreage owner in Kenya, and is getting ready to carry out seismic on Block 2B. They recently attracted Maxwell Birley as CEO. Mr. Birley has been instrumental in discovering more than 2 billion barrels of oil equivalent in his 30-year career—much of it in Africa and Asia.

In an exclusive interview with Oilprice.com, Taipan CEO Maxwell Birley discusses:

• Why Kenya is the hottest venue in East Africa
• Why 2013 will be a stellar year for Kenya
• Why the regulatory environment remains attractive
• Why Kenya outranks its neighbours
• Why infrastructure will be in place in time for commercial activity
• Why this venue is good for the juniors
• Why the Somalia security risk remains low
• What Taipan is really chasing

Interview by James Stafford of Oilprice.com

James Stafford: There were some major discoveries in Kenya last year. Could you give me some colour on these discoveries that has the market thinking Kenya is now one of the hottest exploration spots on earth?

Maxwell Birley: There are a couple—or 2 billion--reasons actually. First, two recent discoveries by Tullow in the Tertiary Lokichar basin of Kenya are in similar geological settings as the discoveries also made by Tullow in the Albertine Basin in Uganda, just to the west.

Uganda has over 2 billion barrels, and the discoveries are similar enough that one could assume the eventual size of the resources in the Lokichar basin could be in the billions of barrels range as well.
There are also other Tertiary basins in Kenya that are attractive. Based on geochemical work we recently did it's possible that the eventual hydrocarbon resource size for the whole of Kenya could be much higher than this.
Being specific the unrisked prospective resources for Taipan's acreage in Kenya is 530 million barrels. We also believe that this estimate will likely increase to approximately 1.0 billion on completion of our studies.

These estimates are for only 2 blocks in Kenya, if this is reasonably extrapolated to other blocks across the country one can easily forecast very significant hydrocarbon resource sizes indeed.
James Stafford: What's the easiest and most challenging thing about working with the Kenyan government and in the Kenyan political climate?
Maxwell Birley: The Ministry of Energy is always ready for a meeting. They listen to our concerns and take the appropriate action. They quickly follow up and give us the support that we need with other Ministries. In the field the local administration is also very helpful. We have regular meetings to make sure our work continues without a hitch.
With regard to the political climate, there is an election coming up in March 2013. We're making arrangements so that we do not have a slowdown in seismic operations during that period. The last elections in 2007 were associated with some “geographically limited” security issues, however these were located far from our areas of operation, so we are not expecting the elections to have much impact on our operations.
James Stafford: The Kenyan government is reviewing its oil and gas regulations. Among the suggested amendments is one that would see the National Oil Corporation (NOC) get a 25% interest in oil properties that foreign firms are operating in Kenya, but this would put the government in a precarious position vis-à-vis attracting investors. How do you see this playing out in the end?
Maxwell Birley: The government is reviewing the terms that shall apply for licences/contracts that will be granted in the future. Oil companies will review all the terms on offer at the time of bid submission and compare them to the attractiveness of the acreage.
James Stafford: In November last year, Kenya expelled Norwegian Statoil, after revoking its exploration license. Is Nairobi increasingly ‘policing' exploration, and what will this mean for investors in the near/medium term?
Maxwell Birley: One of the main functions of the Ministry is to regulate the companies undertaking exploration activities in Kenya. We feel confident, as in many other countries where we have worked, that if you carry out your commitments in the timeframe of the PSC then your license is 100% secure. If we decide to go into the next phases of exploration on Block 2B we can continue to explore for hydrocarbons on the block for another 4.5 years without concerns to the validity of our contract.
James Stafford: How does the industry view the financial terms offered by Nairobi in oil and gas?
Maxwell Birley: We believe the terms are reasonably attractive, at least for an oil discovery. The reason that only a few exploration wells were drilled in the past was due to the lack of exploration success—and this was driven by the lack of understanding by the oil companies of the basins. It wasn't because of financial terms offered by the government.
Now that a discovery has been made and our knowledge is increasing, we are going to see a significant increase in drilling activity and therefore reserve additions to the country.
James Stafford: Is Kenya becoming more a game for the majors rather than the juniors, and do you think we will see more joint ventures in the near future?
Maxwell Birley: In our opinion there is a place for small companies at every stage of the development of an oil province. But it's definitely good news for those juniors with large land positions already in the country. The early movers--i.e. the companies like Taipan that acquired their acreage before the oil was discovered—will benefit from the recent oil discoveries. Most of the more prospective acreage has now been leased and therefore the competition for land is increasing.
As large volumes of oil are discovered, the large independent and Majors will start to notice the country more and more. The Majors—due to their size and complexity—tend to be exploration risk averse and prefer to concentrate on large, lower-risk developments.
James Stafford: How would you like to see Nairobi interact with the energy sector moving forward? And how does Kenya compare with other venues in the region like Ethiopia, Tanzania, and Sudan?
Maxwell Birley: There is no doubt that Nairobi is a premium location for business, tourism and families. This is illustrated by the fact that many multi-nationals operating in the sub-Sarahan African region have their head offices in Nairobi. Regarding interaction, it is the oil industry that will need to develop an active and well respected industry body so that broad industry issues can be discussed at the higher levels.
James Stafford: Kenya is clearly the East African leader in oil infrastructure, and is now starting the Lamu Port-South Sudan-Ethiopia Transit corridor (LAPSSET) project. But it will cost $25 billion for the roads, the 1200 km pipeline and 120,000 barrel-per-day refinery. How feasible do think this project is and why? Is it feasible in the timeframe projected by Nairobi?
Maxwell Birley: The resources in Uganda and to some extend south Sudan must be exported. A pipeline through Kenya seems to be the most feasible.
Regarding the time line, having 2.5 billion barrels sitting in the ground just west of Kenya in Uganda is a really strong motivation to build the pipeline quickly. In South Sudan I think they started pumping oil back up north again now, but I think they will want to go through Kenya in the near future.
Whether it's LAPSSET or the Tullow consortium someone is going to build a pipeline through Kenya to the coast in the next few years. We think the pipeline will be located within 175 kilometres from our acreage. The pipeline will be good for everybody in the region but it should be particularly positive for us.
So when we make a discovery on Block 2B, the pipeline will be in the construction phase. In the interim we'll truck the oil by bowser the early production from the fields. Then, depending on the size of any discoveries, we'll build a connecting pipeline into the pipeline from Uganda. I think we're in a very fortunate position now.
James Stafford: In terms of exploration what are the ‘sweet spots' in Kenya?
Maxwell Birley: Definitely the Anza Basin. Currently, the proven sweet spots are in the Tertiary sediments of the rift basins of Uganda and Kenya. More specifically to Kenya in the Lokichar Basin as proven by the Ngamia and Twiga wells by Africa Oil.
These basins form part of the larger East African Rift system. This is a very extensive rift system and many new plays will be discovered in the next few years. The Anza Basin is the largest of these East African rift basins and 10 times the size of Uganda's Albertine Basin and Kenya's Lokichar Basin. This rift contains Jurassic, Cretaceous and Tertiary sediments.
Taipan is exploring for oil in the south eastern end of the Anza basin. Located on block 2B we have proven more than 9,500 feet of Tertiary section on the block. From the geochemical modelling we have undertaken we see the same oil source rocks in the Anza Basin that are present in the Lokichar basin, which are highly likely to be mature for oil generation on Block 2B. In addition we also believe that more oil discoveries will be made in the Cretaceous and Jurassic basins if you can find favourable places to drill.
James Stafford: What has Taipan's proprietary technical work in Block 2B in the Anza Basin demonstrated so far?
Maxwell Birley: The Anza basin has proven oil-prone Cretaceous source that in places is potentially in the gas window (Bogal gas discovery), however our technical work has also demonstrated that the basin has an active Tertiary lacustrine (lake) oil source that is in the oil window. Consequently, the Anza basin has an excellent chance of being a much more significant oil producing basin than the small rift basins that have so far been discovered.
James Stafford: And that's what you're really chasing here—with these roughly 10 million acres in the Anza Basin—the tertiary play...
Maxwell Birley: Agreed. What we're primarily chasing in Block 2B is the same Tertiary oil play that Tullow inherited originally in Uganda. The discoveries there were the main reason Africa Oil and Tullow drilled the Ngamia and Twiga oil wells in Kenya—which have also been very successful. Of course, don't overlook the fact we also have a secondary Cretaceous oil play in the block, that appears to be broadly analogous to the Cretaceous plays present in the Muglad Melut basins of southern Sudan and is the main focus of exploration efforts in Block 10A, operated by Africa Oil Corp.
Regarding the rest of our acreage, in Block 1 for example where we have a 20% interest in a 31,781 Km2 block we are chasing older Cretaceous, Jurassic and Permo-Triassic plays. The block is located in an extension of the successful Ogaden Basin of Ethiopia and Somalia. We think the block will be very prospective as it is surrounded by oil seeps and a well that recovered oil on test.
The 2 blocks combined makes us the 4th largest acreage holder in Kenya. In terms of near-term drilling and catalysts in the region, we have Tertiary, Cretaceous and Jurassic plays on Block 1 and Block 2B that will be drilled in the next 12 to 18 months.
James Stafford: Tell us what 2013 will look like for exploration in Kenya?
Maxwell Birley: Ten exploration wells should be drilled in Kenya in 2013. Based on the previous success rate it is expected that a significant number of these will be discoveries. Tullow will continue drilling wells on Blocks 10BB and 13T on the west side of the country to find more oil in that string of pearls.
Also we shall shortly get the results of the Paipai-1 well which is currently drilling in northern part of the Anza Basin. The well is testing Cretaceous & Jurassic plays, with a potential 121 million barrels. Other wells including Sabisa and Kinyonga also expected to be drilled in 2013.
James Stafford: For Kenya, a discovery at Paipai-1 would prove that oil discoveries of Sudan extend into Kenya. What would it mean for Taipan?
Maxwell Birley: There have already been Cretaceous gas discoveries in Kenya. Taipan believes that if you can find the Cretaceous that has not been buried too deep it will be prospective for oil. However we think the Paipai well is very high risk as it seems likely to be a recent tectonic inversion structure and therefore may be breached by recent faulting. We think we can find on Block 2B Cretaceous structures that are oil prone that have not been breached by recent faulting. So if that well does come in then it is going to be good news for the Anza Basin in general, but if dry it will not write off the Cretaceous potential in our block. Having said that I should point out that this is not our main focus at this time.
James Stafford: What about other prospects, like the Kinyonga well?
Maxwell Birley: Kinyonga is the next big prospect that is going to be drilled by Africa Oil Corp. and that is very meaningful for us. Kinyonga, which is on Block 9, will be located relatively close to our block, is both Tertiary and Cretaceous prospect. It has an unrisked resource estimate of 320 million barrels prospective, and it is one of the largest prospects in Africa Oil's portfolio of drilling targets. Africa Oil also has another prospect called Pundamilia which is even closer to our block. This prospect has a unrisked resource Best estimate of 402 million barrels and a High estimate of 952 million barrels which I believe is the largest prospect in Africa Oil's portfolio.
James Stafford: And what is the status of Kinoyonga?
Maxwell Birley: The timeline Africa Oil report for Kinoyonga is the 2nd half of 2013.
James Stafford: That would be a pretty big corollary for Taipan ….
Maxwell Birley: I think that even prior to getting those drilling results; investors are going to become more aware that the Tertiary play extends into our block. This was proven by the Hothori well which encountered 9500 ft. of Tertiary sediments. Better than this based on seismic data we estimate that in parts of the block there could be greater than 15,000 feet of Tertiary sediments.
James Stafford: What can we expect from Taipan over the next six months?
Maxwell Birley: Taipan has contracted BGP to acquire up to 800 kms of 2D seismic survey and Arkex to acquire a block wide FTG survey both over Block 2B. The seismic will commence recording in January 2013 and the FTG in February. Both surveys will be completed and interpreted prior to the 1st June deadline to complete the work. We expect to enter the first additional exploration period and are planning on drilling a well late 2013 early 2014.
Taipan has a 20% interest in Block 1 where Afren has recorded 1900 kms of seismic data.
After the seismic has been processed and interpreted the company will commence preparations for well to be drilled in late 2013/early 2014.
James Stafford: What do you expect to learn from this North Eastern data?
Maxwell Birley: We will be acquiring world class seismic data with an extremely high fold in Block 2B. We may record data with fold as high as 540 (other operators in Kenya usually only record at 60 fold). We will do this so that we get excellent signal to noise ratio and seismic data improvement. This will then enable us to predict with some certainty the areas that have high shale to sand ratios. This in turn will indicate where the Tertiary lakes sediments were deposited. This will dramatically increase the chances of drilling a successful oil well.
James Stafford: Let's close off then with a note on security and Taipan's potential concerns in that area...
Maxwell Birley: Our acreage is in a remote region with very few inhabitants. We always take the appropriate health and safety precautions for example we've carried out detailed security risk assessments and we have visited the areas on a number of occasions. We work with other operators and security companies to ensure we have good local information.

To mitigate the risk, we have 50 to 60 armed police on the seismic crew to supply physical security. More importantly we have excellent support from the government and local authorities. We are in the process of undertaking some CSR water projects so that local people benefit from our activities. We also have a team from the area that is in the field communicating continuously to ensure that the local community understands what we are doing and observes the benefits of working with Taipan.

So in summary, we take it all pretty seriously. There are risks, however, it's a place where you can work, so we're being very respectful and careful to nurture successful relationships.

James Stafford: Has Kenya's intervention in Somalia had any impact on exploration in the border area?

Maxwell Birley: Yes, it has ensured that oil companies can undertake their work in relatively safe conditions.

James Stafford: Mr. Birley, best of luck. Thank you for your time and we will check in with you later in the year.

Source: http://oilprice.com/Interviews/Kenyan-Oil-Hot-and-Getting-Hotter-Interview-with-Taipans-Maxwell-Birley.html

The use of synthetic master events for waveform cross correlation

Another EGU 2013 abstract

Abstract

It has been clearly demonstrated that waveform cross correlation substantially improves signal detection, phase association and event building. These processes are inherently related to the Comprehensive Nuclear-Test-Ban Treaty (CTBT) monitoring. The workhorse of cross correlation is the set of seismic master events (earthquakes or explosions) with high quality waveform templates recorded at array stations of the International Monitoring System (IMS). For the monitoring to be globally uniform, these master events have to be evenly distributed and

their template waveforms should be representative and pure. However, global seismicity is characterized by a non-uniform distribution. Therefore, the master events selected from the Reviewed Event Bulletin (REB) produced by the International Data Centre (IDC) can be found in the areas constrained by the global seismicity. There are two principal possibilities to populate the globe with master events: to replicate real REB events or to build synthetic events. Here we compare the performance of these two approaches as applied to the aftershock sequence of the April 11, 2012 Sumatera earthquake. To compute synthetic waveforms, we use AK135 teleseismic velocity model and local CRUST-2 models for source and receiver, and four different source functions representing three different source mechanisms for earthquakes and one for explosion. The synthetic modelling is performed for teleseismic events and based on the stationary phase approximation to a wave equation solution developed by J. Hudson.

The grid covering the aftershock area consists of 16 points. For each grid point, we find detections associated with real, replicated, and four versions of synthetic master events at seven IMS array stations, and then build event hypothesis using the Local Association (LA) procedure based on the clustering of origin times as estimated by back projection of the relevant arrival times with known master/station travel times. Then all conflicts between the hypotheses built by different masters for physically same events are resolved. There are two principal ways to compare the performance of actual, replicated, and synthetic master events: to compare the characteristics/distributions of detections (also station dependent) and those of event hypotheses. Both datasets have shown that the synthetic events provide the same overall performance as the real and replicated master events. The best performance is associated with the explosion source and the earthquake with the Harvard CMT solution for one of real events. When source mechanism and velocity model are appropriately chosen, the global grid of synthetic masters may allow a reduction in the magnitude threshold of seismic monitoring and improving the accuracy and uncertainty of event locations at the IDC to the level of the best located events. When a ground truth event is available, one can expand its influence over hundreds of kilometres.

 

Key words: array seismology, waveform cross correlation, synthetics, seismicity, master events, IDC, CTBT

Seismicity of the North Atlantic as measured by the International Data Centre using waveform cross correlation

An abstract submitted to the EGU 2013

Abstract

The Technical Secretariat (TS) of the Comprehensive Nuclear‑Test-Ban Treaty Organization (CTBTO) will carry out the verification of the CTBT which obligates each State Party not to carry out nuclear explosions. The International Data Centre (IDC) receives, collects, processes, analyses, reports on and archives data from the International Monitoring System. The IDC is responsible for automatic and interactive processing of the International Monitoring System (IMS) data and for standard IDC products. The IDC is also required by the Treaty to progressively enhance its technical capabilities. In this study, we use waveform cross correlation as a technique to improve the detection capability and reliability of the seismic part of the IMS. In order to quantitatively estimate the gain obtained by cross correlation on the current sensitivity of automatic and interactive processing we compared seismic bulletins built for the North Atlantic (NA), which is a seismically isolated region with earthquakes concentrating around the Mid-Atlantic Ridge. This allows avoiding the spill-over of mislocated events between adjacent seismic regions and biases in the final bulletins: the Reviewed Event Bulletin (REB) issued by the IDC and the cross correlation Standard Event List (XSEL).  To begin with, we cross correlated waveforms recorded at 18 IMS array stations from ~1500 events reported in the REB between 2009 and 2011. The resulting cross correlation matrix revealed the best candidates for master events. We have selected 60 master events evenly distributed over the seismically active zone in the NA. High-quality signals (SNR>5.0) recorded by 10 most sensitive array stations were used as waveform templates. These templates are used for a continuous calculation of cross correlation coefficients in the first half of 2012.  All detections obtained by cross-correlation are then used to build events according to the current IDC definition: at least three primary stations with accurate arrival times, azimuth and slowness estimates. The qualified event hypotheses populated the XSEL. In order to confirm the XSEL events not found in the REB, a portion of the newly built events was reviewed interactively by experienced analysts. The influence of all defining parameters (cross correlation coefficient threshold and SNR, fk-analysis, azimuth and slowness estimates, relative magnitude, etc.) on the final XSEL has been studied using the relevant frequency distributions for all detections vs. only for those which were associated with the XSEL events. These distributions are also station and master dependent. This allows estimating the thresholds for all defining parameters, which may be adjusted to balance the rate of missed events and false alarms. 

Waveform cross correlation at the International Data Centre: comparison with Reviewed Event Bulletin and regional catalogues

The European Geosciences Union General Assemly 2013 is coming.  We have submitted three abstracts and are currently focused on this work. Have no time to do economics/finances. This is one of three abstracts.

Abstract

Waveform cross correlation substantially  improves detection, phase association, and event building procedures at the International Data Centre (IDC) of the Comprehensive Nuclear-Test-Ban Treaty Organization. There were 50% to 100% events extra to the official Reviewed Event Bulletin  (REB) were found in the aftershock sequences of small, middle size, and very big earthquakes. Several per cent of the events reported in the REB were not found with cross correlation even when all aftershocks were used as master events. These REB events are scrutinized in interactive analysis in order to reveal the reason of the cross correlation failure. As a corroborative method, we use detailed regional catalogues, which often include aftershocks with magnitudes between 2.0 and 3.0. Since the resolution of regional networks is by at least one unit of magnitude higher, the REB events missed from the relevant regional catalogues are considered as bogus. We compare events by origin time and location because the regional networks and the International Monitoring System are based on different sets of seismic stations and phase comparison is not possible.   Three intracontinental sequences have been studied: after the March 20, 2008 earthquake in China (m_b(IDC)=5.4), the May 20, 2012 event in Italy (m_b(IDC)=5.3), and one earthquake (m_b(IDC)=5.6) in Virginia, USA (August 23, 2011).  Overall, most of the events not found by cross correlation are missing from the relevant regional catalogues. At the same time, these catalogues confirm most of additional REB events found only by cross correlation. This observation supports all previous findings of the improved quality of events built by cross correlation. 

Sustainable trends and periodicity in consumer price indices indicate that the era of low energy prices is approaching

Our new paper on CPI and core CPI is now available via MPRA. 

Abstract
Five years ago, we found three distinct periods characterized by sustainable quasi-linear trends in the difference between the headline consumer price index (CPI) and the core CPI in the USA. Then we revealed similar behavior in the differences between the CPI and indices of various consumer expenditure categories. We estimated the duration of these trends which varies in a wide range from 8 years to more than 20 years. The transition periods to new trends span shorter intervals of 2 to 5 years. The transition is characterized by a higher level of volatility in the studied CPI differences. In this study, we revisit the revealed trends and transition periods using additional CPI estimates between 2008 and 2012. It is found that our major predictions are right: the headline CPI intersected the core CPI in 2011 and both variables have been evolving in sync since then. The difference between the core CPI and the index of energy has been suffering a transition period since 2008 with extremely high fluctuations. The index of food has been growing relative to the core CPI and did not reach its turning point. The difference between the core CPI and the index of housing passed through its transition period in 2008. When normalized to the CPI, the differences associated with energy and housing demonstrates clear periodicity. The observed trends and periodicity allow predicting the evolution of energy, food, and housing at a horizon of twenty five and more years. The consumer price index of energy may fall in 2013 by ten to twenty per cent from the 2012 level. The periodicity of the related normalized difference implies that this fall may extend into the second half of the 2020s. The housing index will be also falling relative to the core CPI, partly due to its energy related components. It is not excluded that the food price index will be rising another five to ten years. The secular fall in energy and housing prices may induce a lengthy period of very low inflation.

The Headline And The Core Consumer Price Index

The US economy is likely approaching a period of very low, if not negative, price inflation. Our analysis shows that the consumer price index, CPI, will lag behind the core CPI. Deflation is dark time for investors, as the case of Japan unambiguously demonstrates.

The core CPI is often used as a reliable estimate of inflation trends over longer time horizons. It is a well-known fact that the monthly CPI readings reported by the BLS are highly volatile and may give misleading signals on the long-term trends. Usually the prices of food and energy are excluded from the headline CPI in order to obtain a smoother time series. The food and energy prices are considered as having higher volatilities which are responsible for the largest fluctuations observed in the CPI. Therefore, it is implied that the core CPI just misses a stochastic process with a large standard deviation. However, in the long ran the relative evolution of the core and headline CPI is more informative than a simple stochastic time series.

Figure 1 illustrates the evolution of the measured CPI and core CPI in the USA after 1957. Unfortunately, no estimates of the core CPI are available before 1957. Both indices are for all urban customers and seasonally adjusted. In Figure 1, one can observe that the curves are very close before 1980 - the core CPI practically evolved in sync with the CPI. After 1981, the curves diverge with the core CPI growing faster than the CPI. The gap between the indices widens through 2000, and then the curves start to converge and coalesce in the first quarter of 2011.



Figure 1. The evolution of the headline and core CPI in the USA.

A better view on the periods of the CPI and core CPI divergence and convergence is represented by the difference between these variables, as displayed in Figure 2. The difference is apparently characterized by the presence of three distinct segments of quasi-linear trend and two short transition periods. Between 1960 and 1978, the difference is relatively stable and varies in a narrow range around +1 unit of index. Between 1979 and 1982, the curve falls to -2 and then suddenly changes its direction. From 1982 to 1999, the core CPI is growing consistently faster and a gap of about 10 units is created. The curve between 1982 and 1999 is well approximated by a straight line with small-amplitude deviations; the latter might be associated with measurement noise. The slope of the linear regression line presented in Figure 2 is -0.7 with R²=0.96. In other words, during these eighteen years the headline CPI was growing by 0.7 units of index faster than the core CPI.

There was another period of high volatility between 1999 and 2002 similar to that observed between 1979 and 1982. The gap reached its peak value two times - in 1999 and in 2003. Since 2003, the gap has been closing in line with a faster growing headline CPI, i.e. the food and energy prices had higher rates of growth. Nevertheless, the CPI was consistently below the core CPI, as Figure 1 demonstrates. In 2008, we extrapolated the observed rate of convergence between the CPI and core CPI and estimated the intercept time somewhere between 2009 and 2010 (here we ignore a short term spike in oil prices in 2008). This negative linear trend was also very reliable with R²=0.91. The convergence was faster - approximately 1.6 units of index per year.

When extrapolated the structure of the difference into the future, we suggested that it would be increasing during the next 8 years as a mirror reflection of the trend observed between 2002 and 2008. The projected trend is shown by green line in Figure 2. Since 2008, the actual curve was above and below the green line. Seemingly, we have missed an important feature of the difference which is best seen in a different representation.



Figure 2. The difference between the core and headline CPI.

Figure 3 displays the studied difference normalized to the headline CPI. The pattern is essentially the same as in Figure 2, except the fall in the 1970s, which now has a similar amplitude and duration as the fall between 2003 and 2008. The slope change is almost negligible: from 0.42 in Figure 2 to 0.46 in Figure 3. A striking new feature is the curve self-similarity, which is clear when we shifted the original curve by 30 years ahead (blue line). In other words, the normalized difference is periodic with a period of 30 years. The periodicity suggests a different future, as expressed by a green line with a slope 0.0042. This quasi-linear trend extends into the late 2020s.

In 2012, the normalized curve in Figure 3 returned to the trend. It is highly probable that the rate of CPI growth will fall below that of the core CPI. Equivalently, the joint input of food and energy in the overall price inflation will be declining with time. However, the trajectories of food and energy price evolution are not necessary to be the same.



Figure 3. The evolution of the difference between core and headline CPI normalized to the headline CPI. Blue line represents the original curve shifted by 30 years ahead. The new trend is shown by green line.

If to assume that the evolution of the core and headline CPI is driven by independent stochastic processes like random walks, then the deviation between these indices would be a stochastic process itself. From Figure 3, it is more reasonable to assume, however, that there is a tight link between these variables, which provides the observed repeated shape of the normalized difference. For purely stochastic and independent variables such a periodic behavior is highly unlikely.

There are several simple conclusions from the existence of periods and linear trends in the difference between the CPI and core CPI. Firstly, the consumer prices of food and energy are driven by forces which are independent on those behind other goods and services. Secondly, there are breaks in these forces, when the direction of action reverses. Thirdly, one can extrapolate the evolution of the difference between the CPI and core CPI at a horizon of about twenty five years. Fourthly, there exist relatively short transition periods. These periods are characterized by an elevated volatility.