Thoughts on why energy use and CO2 emissions are rising as fast as GDP

In a recent post, I discovered something rather alarming–the fact that in the last decade (2000 to 2010) both world energy consumption and the CO2 emissions from this energy consumption were rising as fast as GDP for the world as a whole. This relationship is especially strange, because prior to 2000, it appeared as though decoupling was taking place: GDP was growing more rapidly than energy use and CO2 emissions. And even after 2000, many countries continued to report decoupling.

I decided to sift through individual country results, to see if I could see a pattern emerging behind these changing results. When I did this, I found three major groupings of countries:

1. Southeast Asia, excluding Japan, Australia, and New Zealand. This group has been rapidly industrializing. In total, the group’s energy consumption has grown as rapidly as GDP in the last decade, and CO2 emissions have grown faster than GDP. This group includes China, India, Korea, Viet Nam, and a long list of other countries in Southeast Asia, including nearby islands.

2. Middle Eastern Countries. This group showed energy use growing more rapidly than GDP,  suggesting that it was taking more energy to extract oil and to pacify its population, over time. I included all countries in this group that BP includes in its Middle Eastern grouping, even though Israel (and perhaps some other countries) do not fit the pattern well.

3. Rest of the World. This group is the only group showing a favorable trend in energy growth relative to GDP growth, even in the last decade, although the pace of improvement has slowed. Two reasons for this favorable trend seem to be (a) continued growth of services, such as financial service, healthcare, and education, which use relatively little energy and (b) outsourcing of a major portion of heavy industry to Southeast Asia.

When we look at CO2 emissions broken out into these three categories, the shift over time is quite surprising:

Figure 1. Carbon dioxide emissions emitted in year shown by the three major areas described (Southeast Asia, Middle East, Remainder), based on BP Statistical Data

The vast majority of the CO2 increase since 1980 has taken place in the Southeast Asia and the Middle Eastern areas!

The energy intensity of GDP (that is, the amount of energy consumed per trillion dollars of real GDP) has shown very different patterns for the three groups of countries:

Figure 2. Energy Intensity of GDP by Area, based on BP Statistical Data regarding Energy Consumption in Barrels of Oil Equivalent, and USDA Economic Research Data regarding real GDP.

The World energy intensity of GDP has flattened in the last decade, reflecting a combination of the impacts of the three areas. The only area that has an improving energy intensity of GDP is the Remainder group. The Southeast Asia group is roughly flat. The Middle Eastern group is shows increasing energy use, relative to GDP growth.

Based on data in this post, I come to the following tentative conclusions:

1. The industrialization of Southeast Asia has allowed importers from around the world to reduce their energy intensity of GDP, but much of the savings has been offset by greater energy use (largely coal) in Southeast Asia. On a CO2 basis, we are likely  worse off, because of this transfer.

2. There is no evidence that the Kyoto Protocol reduced worldwide CO2 emissions. In fact, to the extent that it encouraged outsourcing of industrial production to the Far East and made goods from the Far East more competitive, it may have contributed to rising world CO2 emissions. It would appear that a different approach is needed that recognizes the fact that fuels are part of a world market. Fuel savings in one part of the world are not necessarily helpful for the world as a whole.

3. In my view, world industrial production has self-organized in a way that assigns different roles to companies operating in the three country groups I described above, as a way to minimize manufacturing costs. Over the long term, this particular version of self-organization cannot continue. The Middle East will reach a point where its oil exports drop rapidly. Southeast Asia will reach maximums on coal production/imports and on pollution levels. The “Remainder” is already reaching limits in competing with Southeast Asia. Unemployment rates are high, manufacturing wages are low, and many workers lack the  income needed to purchase additional services which might “grow” GDP. Continue reading

Pipeline changes to fix WTI/Brent spread are likely to add new problems

For many years, Brent oil (a European grade) and West Texas Intermediate (WTI) oil, a US grade, sold at close to the same price. Starting in January 2011, WTI price dropped below Brent, at times by more than 20%.

When the price of WTI dropped, the prices of quite a few other grades of oil (especially in the Midwest, but perhaps elsewhere) were affected as well. To get an idea of how much the overall impact was, I compared the price refiners pay for oil to that of Brent and WTI (Figure 1).

Figure 1. Average refiners acquisition cost, Brent oil price, and WTI oil price, based on EIA data.

I found that the drop in the prices refiners pay for crude oil prices is much more akin to the drop a person would expect if 40% of crude were affected, than the small drop one would expect if only WTI itself were affected. The price change during 2011 did not seem to be due to changes in average viscosity or in sulfur content either.

Some of the types of crude that have been hit by lower prices are those from the Alberta. Recently, there have been proposals by Canadian companies to try to fix the problem. Enbridge announced that it is buying a 50% stake in the Seaway pipeline, and will reverse its direction, so that it will carry crude oil southward, from Cushing to the Gulf, instead of northward, as soon as the second quarter of 2012. In addition, TransCanada has announced the it wants to build the segment of the Keystone XL pipeline from Cushing to the Gulf, possibly starting as soon as January 2012.

The question now is what impact the proposed pipelines will have. Will they even out the Brent/WTI price disparity, and, at the same time, cause the prices of other crudes, such as Canadian and Bakken crudes, to rise as well? Or will the pipeline adjustments fix only part of the problem, and add new problems at the same time? In my view, the latter seems more likely, for reasons I discuss in this post.

For those who are interested, I wrote a post in February giving more background, which can be found here.
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Is it really possible to decouple GDP Growth from Energy Growth?

In recent years, we have heard statements indicating that it is possible to decouple GDP growth from energy growth. I have been looking at the relationship between world GDP and world energy use and am becoming increasingly skeptical that such a decoupling is really possible.

Figure 1. Growth in world energy consumption (based on BP data) and growth in world real GDP

Prior to 2000, world real GDP (based on USDA Economic Research Institute data) was indeed growing faster than energy use, as measured by BP Statistical Data. Between 1980 and 2000, world real GDP growth averaged a little under 3% per year, and world energy growth averaged a little under 2% per year,  so GDP growth increased about 1% more per year than energy use. Since 2000, energy use has grown approximately as fast as world real GDP–increases for both have averaged about 2.5% per year growth. This is not what we have been told to expect.

Why should this “efficiency gain” go away after 2000? Many economists are concerned about energy intensity of GDP and like to publicize the fact that for their country, GDP is rising faster than energy consumption. These indications can be deceiving, however. It is easy to reduce the energy intensity of GDP for an individual country by moving the more energy-intensive manufacturing to a country with higher energy intensity of GDP.

What happens when this shell game is over? In total, is the growth in world GDP any less energy intense? The answer since 2000 seems to be “No”.

It seems to me that at least part of the issue is declining energy return on energy invested (EROI)–we are using an increasing share of energy consumption just to extract and process the energy we use–for example, in “fracking” and in deep water drilling. This higher energy cost is acting to offset efficiency gains. But there are other issues as well, which I will discuss in this post.

If GDP growth and energy use are closely tied, it will be even more difficult to meet CO2 emission goals than most have expected. Without huge efficiency savings, a reduction in emissions (say, 80% by 2050) is likely to require a similar percentage reduction in world GDP. Because of the huge disparity in real GDP between the developed nations and the developing nations, the majority of this GDP reduction would likely need to come from developed nations. It is difficult to see this happening without economic collapse.

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Financial Impacts of Reaching ‘Limits to Growth’

I gave a talk on expected financial implications of the oil limits that we are now reaching at a recent meeting of the Association for the Study of Peak Oil-USA. My talk consisted of two parts:

  1. Why the impact of oil supply limits is expected to be more severe than simply a reduction in oil supply would imply. I believe we are really reaching a more general “limits to growth” because of the impact of high oil prices, interconnectedness of all of the systems, and the short-term inability to substitute one fuel for another. (Slides 2-11)
  2. What the short-term financial impacts might be (Slides 12-17).

Slide 1

I have written about Limits to Growth previously. See this post for a longer version of why I believe we are reaching limits to growth. A PDF version of the slides can be found at this link: Financial Impacts of Reaching Limits to Growth. Continue reading

Understanding our Economic Trajectory – 1952 to Today

This is a guest post by “Shunyata.” Shunyata has training in financial engineering, actuarial science, statistics, and mechanical engineering. While he does not work directly with structural economic theory, his background in financial engineering gives him insights. The observations below represent Shunyata’s personal opinions based on his study of economics and monetary policy to protect his personal interests. This post is not intended to represent investment advice.

Since 1952, US Nominal GDP has grown by about 6% per year. Why did this growth occur?

A. Did the economy discover new efficiencies and/or develop new natural resources?

B. Did Government monetary policy artificially inflate GDP?

C. Did Society borrow against tomorrow to purchase luxuries today? (…meaning that Society borrowed against tomorrow’s GDP to inflate today’s growth.)

Certainly reality is a mixture of all three mechanisms, but is one dominant? We would hope for (A). We can live with (B). But (C) would be troubling.

We can evaluate the impact of monetary policy by examining Real GDP trends. Figure 1 shows Gross GDP divided by CPI to bring everything to 2011 levels.

Figure 1

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