Why World Coal Consumption Keeps Rising; What Economists Missed

A primary reason why coal consumption is rising is because of increased international trade, starting when the World Trade Organization was formed in 1995, and greatly ramping up when China was added in December 2001. Figure 1 shows world fossil fuel extraction for the three fossil fuels. A person can see a sharp “bend” in the coal line, immediately after China was added to the World Trade Organization. China’s data also shows a sharp increase in coal use at that time.

Figure 1. World fossil fuel supply based on world production data from BP's 2012 Statistical Review of World Energy.

Figure 1. World fossil fuel supply based on world production data from BP’s 2012 Statistical Review of World Energy.

China and many other Asian countries had not previously industrialized. The advent of international trade gave them opportunities to make and sell goods below the cost of other countries. In order to do this, they needed fuel, however. The fuel the West had used when it industrialized was coal. Coal had many advantages for a newly industrialized countries: it often can be extracted without advanced technology; it is relatively cheap to extract; and it is often available locally. It can be used to make many of the basic items used by industrialized countries, including steel, concrete, and electricity.

The industrialization of Asian countries was pushed along by many forces. Companies in the West were eager to have a way to make goods cheaper. Buyers were happy with lower prices. Even the Kyoto Protocol tended to push international trade along. This document made it clear that countries signing the document wouldn’t be in the market for coal. From the point of the developing countries, this would help hold coal prices down (at least in the export market). It also likely meant a better long-term supply of coal for developing countries. The Kyoto Protocol offered no penalties for exporting products made with coal, so it put countries that used coal to make products for export in a better competitive position. This was especially the case if Kyoto Protocol countries used carbon taxes to make their own products higher priced.

Apart from the international trade /industrialization issue, there is another issue that is helping to keep coal consumption rising. It is the fact that oil supply is in short supply and high priced, and this means that economies of countries that disproportionately use a lot of oil in their economies are at a competitive disadvantage. Countries coming “late to the party” are in a good position to develop their economies using little oil and much coal, and thus keep overall energy costs down. This approach gives the developing countries a competitive advantage over the developed countries.

Let’s look at a few graphs. In terms of  oil leverage (total energy consumed /oil energy consumed), China and India come out way ahead of several other selected country groups.  They do this with their heavy use of coal.

Figure 2. Ratio of total energy consumed to oil (including biofuels) consumed, based on BP's 2012 Statistical Review of World Energy.

Figure 2. Ratio of total energy consumed to oil (including biofuels) consumed, based on BP’s 2012 Statistical Review of World Energy.


Based on Figure 3, below, the GDP of countries with a lot of coal in their mix seems to grow more quickly than other countries.

Figure 3. 2009-2011 Average Real GDP % Growth, Based on USDA International Macroeconomic Data Sets. World GDP reflects 2005$ weighting.

Figure 3. 2009-2011 Average Real GDP % Growth, Based on USDA International Macroeconomic Data Sets. World GDP reflects 2005$ weighting.

In recent years, oil has been the most expensive of fossil fuels. Thus, a country that uses mostly oil will, on average, have higher energy costs than a country that can dilute out its oil use with the use of cheaper fuels.

Figure 4 below shows average  oil, natural gas, and coal prices for some representative categories of these fuels.

Figure 4. Price per metric ton of oil equivalent, based on World Bank data for the period Jan.- Nov. 2012. All prices have been converted to a metric ton of oil equivalent basis.

Figure 4. Price per metric ton of oil equivalent, based on World Bank data for the period Jan.- Nov. 2012. All prices have been converted to a metric ton of oil equivalent basis.

Among the types of fuels shown, oil is the highest-priced. The coal price is much lower, especially if it is locally produced. If it is transported long-distance, the cost of transport will add to its price. Natural gas prices vary around the world, but tend to be between coal and oil prices.1 It is not possible to know exactly what the average fuel price of each country group shown on Figure 2 and 3 is, but we can make a rough approximation using the average prices shown in Figure 4. Such an approximation is shown in Figure 5.

Figure 5. Rough estimate of average cost per metric ton of oil equivalent for the various countries and groups shown, based on distribution of fuels used, from BP Statistical Review of World Energy, and prices from Figure 4.

Figure 5. Rough estimate of average cost per metric ton of oil equivalent for the various countries and groups shown, based on distribution of fuels used, from BP Statistical Review of World Energy, and prices from Figure 4.

A person can see from Figure 5 that the average cost of fossil fuel energy is higher for the countries at the top of the chart, and lower for those near the bottom of the chart. There are various adjustments that might be made, such as adding the effect of carbon taxes on fossil fuel to the costs for European countries, and adjusting for the low value of the Euro recently. Both of these would tend to raise the average cost of fossil fuels for European countries.

Also, the world average fuel cost is probably overstated in Figure 5. In my list of country groups analyzed, I purposely excluded major oil exporters, such as Saudi Arabia, since these can be expected to behave differently than other countries. Quite a few of these exporters can afford to subsidize oil costs for their own people and for manufacturing within their countries, because their actual oil extraction costs are lower than the world oil price. If we were to adjust for this, the world average fuel price in Figure 5 would probably be reduced.

The Figure 5 averages include only fossil fuels (coal, oil, and natural gas), and exclude other fuels such as nuclear, hydroelectric, wind, and solar PV. Fossil fuels represent 92%-93% of energy supply in China and India, based on BP Statistical Review of World Energy data. In Europe, fossil fuels represent 79% of total fuels; in the US and Japan, they represent 86% to 87% of the total.

A Look at How Fuel Consumption Is Actually Changing

Oil consumption is decreasing in the countries with relatively slow GDP growth, and increasing in India and China:

Figure 6. Percentage growth in oil consumption between 2006 and 2011, based on BP's 2012 Statistical Review of World Energy.

Figure 6. Percentage growth in oil consumption between 2006 and 2011, based on BP’s 2012 Statistical Review of World Energy.

I would interpret this to mean that as the weaker economies (which tend to use a higher proportion of oil in their energy mix) are priced out of the market, more of the oil is going to the countries that can leverage its use better. Unfortunately, a barrel of oil saved by Europe, the US, or Japan, means another barrel that can stay on the world market and be used by China, India, and other developing countries with better leveraging.

A barrel used in the developed world would “only” be leveraged up by other fuels by roughly a factor of 2.0 to 2.75, and some of this leveraging would be hydroelectric or nuclear electric, which is fairly benign from a carbon dioxide point of view. If that same barrel of oil is instead used by China, it can be leveraged up by a factor of 5.7. Thus a barrel of oil saved by the developed world can be transferred to China and used to greater positive effect, from the point of view of producing cheap consumer products and a greater negative impact, from the point of view of CO2 impact.

What did Economists Miss?

Unfortunately, the list is rather long.

1. The most basic issue economist missed is that energy is required to make goods and services. If production of a product is transferred to another country, that country will need energy supplies–probably cheap, easy to extract, energy supplies–to make that product. It doesn’t make much sense to look at fossil fuel consumption, stopping at a country’s own borders. If we want products to be made in an environmentally sound way, and we want our own citizens to be employed, we need to make them at home, and figure out a better way of counting CO2 production.

2. World oil supply is constrained. This means that even with additional demand, oil supply can’t rise very much. Additional demand doesn’t do much more than raise price. A reduction of demand, within a range, simply reduces price, without really reducing production. Beyond a point, a reduction in demand does temporarily reduce both price and production, as it did in 2008. But demand is likely to quickly bounce back, leading to another price spike, and further constrained supply. Standard economic models seem to assume this situation can’t exist.

3. In a situation of constrained oil supply,  if a country reduces its oil consumption, it doesn’t mean that more oil will be left in the ground. Instead, the oil saved goes back on the world oil market (perhaps at a slightly lower price) and is bought by someone else who can make better use of it.

4. The mix of types of energy used by a country changes very gradually over time, because it is very difficult to substitute one kind of fuel for another without significant investment (for example, modifying cars to use natural gas and building pipelines for the natural gas). In general, for the short term, the mix is fixed. For example, in Figure 7 below, the world oil leverage remained constant in the period prior to 2000. It then gradually increased, as oil prices rose. There was no big change when the 2008-2009 recession hit. A drop in oil consumption tended to lead to a drop in electricity consumption as well, and a drop in fuel use of all kinds.

Figure 7. World oil price (Brent) in 2011$ from BP's 2012 Statistical Review of World Energy and Leverage based on ratio of total fuel consumption to oil consumption from the same report.

Figure 7. World oil price (Brent) in 2011$ from BP’s 2012 Statistical Review of World Energy and Leverage based on ratio of total fuel consumption to oil consumption from the same report.

I have written about this issue in my post, How Is an Oil Shortage Like a Missing Cup of Flour? In that post, I pointed out that to the extent proportions are fixed by built infrastructure, if there is a shortage (or excessively high price) of one necessary input (oil in the case of the economy; flour in the case of a batch of cookies), it is necessary to make a smaller batch. In the case of an economy, a smaller batch looks like a recession, with lower oil use, lower electricity use, and lower employment. This same pattern of all three types of fuel use dropping simultaneously can also be seen when viewing recent changes in world oil, coal, and natural gas supply, in Figure 1 at the top of this post.

5. If an economy such as China is not growing as fast as it might otherwise grow because of constrained oil supply, the availability of additional oil on the market because of the Developed Countries cutting back in their use may help China’s economy grow. In fact, China is likely to be able to use the additional oil (as for truck transport) to make it possible to make more goods using coal. Thus, the savings in oil may theoretically lead to increase in coal consumption, on a world basis.

6. The statement is often made that once oil prices rise high enough, renewables will become competitive. This statement is made with blinders on, in a world market for goods and services. What matters in a world market is the lowest total cost of production. Most renewables aren’t even oil substitutes; they are coal or natural gas substitutes, and these are cheaper. Anything that raises the average energy cost of a country relative to other countries makes it less competitive. When  a  country less competitive, it tends to use less oil. The extra oil tends to go to a more competitive country, and may help raise coal usage. Obviously wages make a difference, too, but a country that uses cheap fuels can pay their workers less, and still provide an acceptable standard of living.

7. There are two ways of reducing fossil fuel use that might be effective, but probably would not be well received. One is to cut back on international trade, perhaps by reintroducing taxes on trade. This would reduce fossil fuel usage, because many goods cannot be made without imported raw materials from elsewhere. Another method that would work is to tax (or forbid) fossil fuel extraction in your own country. This would make your country poorer, and less able to buy imports (such as oil and gas) on the world market.

8. I talked about what seems to be the effect of China’s competition on US jobs in another post. It would have been good if economists had foreseen this kind of impact before wholeheartedly endorsing the expansion of world trade.

9. It has recently been pointed out to me by a reader that the way China’s economy works, businesses can earn a lower rate of return than Western countries, and still provide an acceptable profit level, given the way Chinese government interacts with businesses. This gives China another competitive advantage, besides low fuel prices and low wages. See Rise of the FerroDollar.

Note:

[1] In the United States, natural gas prices are currently below the cost of production for many producers because of oversupply. This is not a sustainable situation; one possibility is that some natural gas producers will leave the market, US natural gas supply will drop with fewer producers, and US prices will rise.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
This entry was posted in Alternatives to Oil, Energy policy, Financial Implications and tagged , , , , , , , , . Bookmark the permalink.

59 Responses to Why World Coal Consumption Keeps Rising; What Economists Missed

  1. robert wilson says:

    45 minute lecture by Nate Hagens. The End of Grorth

    • Thanks! I know Nate well, and know he reads as least some Our Finite World posts. I haven’t yet had a chance to listen to the entire video, but the first several minutes are good.

    • Bicycle Dave says:

      Because I’ve followed Nate off and on over the past few years and I genuinely admire his thinking, I watched the entire 45 minute lecture by Nate Hagens – “The End of Growth”. My initial thought was: “this will be a great video to share with friends and neighbors”! Half way into the video I realized I would never share this with anyone. First of all, the mechanics of the video are horrible – Nate is frequently referencing a graph/photo that is never shown; the person doing the video spends far more time taping the backs of heads of the audience than on the presentation slides. Secondly, Nate does a terrible job of organizing this presentation – it’s a kind of a stream-of-consciousness affair.

      If you already understand Nate’s background and POV, there are little gems and nuggets of information in his presentation that are excellent. However, both Nate and the person operating the video camera really need to get their act together. I, for one, would really like to see Nate make an effective presentation of his research findings, conclusions, and suggestions. But, this video presentation is a flop.

      • robert wilson says:

        Nate was critical of the video, especially the inadequate time spent on the slides’

        • Bicycle Dave says:

          Perhaps he’ll be motivated to redo it. I’m sure he could do an excellent half-hour presentation to help explain the multi-faceted aspects of our predicament in simple language. Maybe he needs the help of some media savvy person. I think he has a valuable message.

  2. Brilliant analysis, Gail!

    I guess that the abscissa in Figure 5 is price per toe, not per boe.

    May I request your permission for republishing your post, translated to Spanish, in my blog?

    Warm regards,
    Antonio

    • Sorry about the mix-up with captions. I uploaded a revised Figure 5, so it should be OK now. The names of units seem to be the easiest things to confuse, even when a person knows very well what units are being used. It is almost like confusing the names of a person’s own children accidentally.

      It would be fine to republish, translated into Spanish. Just link back to the original.

  3. Ikonoclast says:

    Gail, you say, “There are two ways of reducing fossil fuel use that might be effective, but probably would not be well received.” You mention tax on trade and tax on fossil fuel extraction.

    There is a third integrated way using carbon taxes and carbon tariffs. This involves a tax on fossil fuel consumption domestically. The burner pays the CO2e tax. With respect to imports you apply a carbon tariff unless the product has provably already had a carbon tax imposed for overseas manufacture and transport for import. If in any doubt, the government, e.g. US government, should levy the carbon tariff anyway.

    This would ensure a carbon price was paid for all goods manufactured or imported. In addition, it would put the US (or other implementing nation) back on a more level playing field and encourage local manufacture.

    With a full carbon price implemented in this way, to counteract global warming if possible, and with all fuel subsidies removed, then let nuclear and renewables compete on price provided both of these also pay their own negative externality and insurance risk costs.

    Under this price regime, domestic manufacture gets some protection and the most cost effective energy solution will win out. Then we don’t have to have the unproductive nuclear power vs, renewables arguments. Let the physics and the markets decide the issue under the taxes and costs regime outlined above.

    • I think it has to be a fairly stiff carbon tax to work though, because the cost difference of coal can be quite large.

      Also, you really can’t correct for China being willing to pollute its land in a way that we would not.

      • Leo Smith says:

        Considering where china came from – famines, emperors, mao tse tung – I think one can be a little lenient.
        People on the post genocidal USA forget how crowded every where else is ?🙂

        • donsailorman says:

          According economic theory, even a small carbon tax would have a large effect–because decisions are made at the margin. To get to an optimum is (in the real world) impossible; see “Theory of the Second Best.”

          In my opinion, burning ever greater amounts of coal is just as bad for planetary ecosystems as all-out thermonuclear warfare would be–ecocatastrophe in either case.

          • Leo Smith says:

            Actually neither all out thermonuclear war or burning every bit of coal there is would do as much harm as has been done – entirely without any human intervention – to the earth in the past and the not so distant past.

            I suggest you look up the scale of the major volcanic eruptions and earthquakes. Not to mention asteroid strikes.

            Even the Japanese tsunami would have taken a large fraction of the worlds stock of nuclear weapons to duplicate – possible all of them.

            The quantities of sulphur dioxide and CO2 and indeed radioactive ash emitted by a large volcanic eruption is several orders of magnitude greater than all the coal burning in the world ever.

            • davekimble2 says:

              > The quantities of sulphur dioxide and CO2 and indeed radioactive ash emitted by a large volcanic eruption is several orders of magnitude greater than all the coal burning in the world ever.

              Completely untrue. Where do you get this rubbish ? Do you think people are going to believe it just because Leo Smith says so ?

            • Leo Smith says:

              I do the actual factual research…

            • davekimble2 says:

              Did you research this?
              http://volcanoes.usgs.gov/hazards/gas/climate.php
              Do the Earth’s volcanoes emit more CO2 than human activities? Research findings indicate that the answer to this frequently asked question is a clear and unequivocal, “No.” Human activities, responsible for a projected 35 billion metric tons (gigatons) of CO2 emissions in 2010 (Friedlingstein et al., 2010), release an amount of CO2 that dwarfs the annual CO2 emissions of all the world’s degassing subaerial and submarine volcanoes (Gerlach, 2011).

            • Leo Smith says:

              Until you get a Tambora or a Krakatoa or a Deccan eruption. Volcanoes are not steady things, Now and again a big one lets go and then, its not average that counts- its peak. It stresses the atmosphere FAR more than steady CO2 emissions.

            • davekimble2 says:

              I notice you still don’t quote any sources for your assertions.

              https://en.wikipedia.org/wiki/1883_eruption_of_Krakatoa#Global_climate
              In the year following the eruption, average global temperatures fell by as much as 1.2 °C (2.2 °F). Weather patterns continued to be chaotic for years, and temperatures did not return to normal until 1888. [volcanoes.usgs.gov]

              So the impact (a cooling due to particulates and SO2) lasted only 5 years and therefore cannot be consider a climate impact, only a weather impact. The CO2 impact (a heating) would have been indistinguishable from all the other volcanic emissions in the history of the planet, before and since 1883. All volcanic eruptions are included in the climate models and the IPCC’s opinion is that these impacts are small compared to anthropogenic causes.

              All this is dealt with in IPCC’s AR4 Working Group 1 Report, Chapter 2.7.2 and no doubt will be improved on in AR5.

            • Are there articles written on this subject, comparing quantities?

  4. Travis says:

    Great work!!!!!!

  5. Don Stewart says:

    For a professional quality exposition of many of the things I have tried to say (amateurishly) about farming and food and carbon sequestion and animal/vegetable rotations and diversification vs. monocrops, see this interview by Chris Martenson:
    http://www.peakprosperity.com/podcast/80255/craig-wichner-new-model-investing-farmland

    I think you can get to it, but there may be a paywall. If there is a paywall, I think it will eventually show up for free. The interview is with one of the principals of Farmland LLP. I rather frequently refer to the writings of Jason Bradford, the other principal.

    Agriculture doesn’t have to hurt! Fossil fuels become less intensively used. This is in line with the Iowa State study which I have referred to which debunked much of the ‘green revolution’ propaganda.

    Don Stewart

  6. The Spanish translation is already available at http://crashoil.blogspot.com.es/2012/12/por-que-el-consumo-de-carbon-sigue.html. Thanks again for your permission, Gail.

  7. T’was the Nightmare Before Christmas
    http://www.doomsteaddiner.org/blog/2012/12/24/twas-the-nightmare-before-christmas-2012/

    T’was the night before Christmas, when across all the seas
    Not a Doomer was stirring, not even RE.
    The False Flags were in the MSM all over the place,
    While Politicians mumbled their words of disgrace.

    The Diners were nestled all snug in their beds
    While visions of Mad Max danced in their heads
    WHD in his Red Afro Wig, and I in my hat
    Had just settled in to watch Civilization go splat.

    When out on the internet there arose such a clatter,
    I sprang to the Laptop to see what was the matter.
    Over to Google I flew like some birds,
    To type in Apocalypse and other Keywords.

    The news on the net was like new fallen snow,
    Flakes of disaster everywhere I would go.
    Off with my wandering keyboard fingers I went to visit
    Zero Hedge, Survival.com and 8 blowhard Collapse Pundits

    The news was so bad I surfed ever faster,
    searching wide to find the cause of disaster.
    More rapid than Assault Rifle gunfire the news came on in,
    Of Earthquakes, Volcanoes and all Human Sins.

    Now Kunstler! Now Orlov! Now, McPherson and even Jim Quinn!
    On Ruppert! On Gail! On, on Denninger and Steve from Virgin!
    To TEOTWAWKI as we head for a mighty big fall!
    Now Dash away, Dash Away! Dash away from it all!

    As Mall Signs and Rooftops before the wild hurricane fly
    When they meet with an obstacle, mount to the sky.
    Every keyboard was flying, calls of the end came everywhere
    The Doomosphere was just chock full of despair.

    And then in a twinkling, I read on the net
    Illuminati across the Globe were begining to Sweat.
    Bond spreads were wide, Futures were down,
    Derivatives and CDOs were beginning to drown.

    Gold bugs were Frantic, piles of Maple Leafs high to the sky,
    While at Safeway and Walmart not a Twinkie to buy!
    Preppers were loading their Glocks full of Lead,
    Hoping to be the last of the Doomers left dead.

    Permaculture raised beds and hydroponics were secured,
    as Industrialization’s Ills could not be cured.
    Heirloom Seeds in Nitrogen vaccuum packs were stored,
    Ground floor windows were covered with 2×4 boards.

    In Central Park all the OWSers set tents on the Grass,
    the showdown with the NYPD would now come to pass.
    The truckers rolled in and the Hell’s Angels too,
    then the Longshoremen came in from out of the blue.

    In CONgress the budget went over the Cliff,
    while Obama said, “Hey, what’s the diff?
    My Man Benny has the Inkjets all ready!”
    No worries folks, the economy will stay steady.

    In Brussels at the IMF the Eurocrats fumbled,
    playing violins as the Euro crumbled.
    In Japan the Sushi was glowing,
    While Abe made sure those Yen kept on flowing.

    In MENA the Drone Aircraft were flying,
    with Women and Children doing most of the dying.
    In the Straights of Hormuz Mines were placed to counter the Drones,
    So all the tankers and carriers would be sent to Davey Jones.

    In China the economy was rocking,
    Ghost Cities and Bridges to Nowhere filled up their stockings.
    Foxconn workers off factory rooftops went jumping,
    While the Iphones out of the factory kept pumping.

    The situation was dire, the whole world was on fire.
    Everyone everywhere all caught in the mire.
    The whole human race so utterly lost,
    Happy Motoring and Industrialization exacting a terrible cost.

    RE sprang to his keyboard to give the Diners some HOPE,
    even though the world seems at the end of its rope.
    They heard him exclaim, ‘ere the Internet went out of sight,
    “Happy christmas to all, and to all a Good Night!”

    Merry Christmas Finite Worlders!

    RE

  8. Pingback: ourfiniteworld.com: Why World Coal Consumption Keeps Rising; What Economists Missed « blogivg

  9. La Curee says:

    Coal corporation going bust to bust us plebs, given this any discussion of ‘economics’ should be hedged around with of course we are all thieving monkeys with incomplete access to info.
    Corporations can die but only to take down real people, what cockroaches we are.
    http://truth-out.org/news/item/13691-in-the-coal-fields-a-novel-way-to-get-rid-of-pensions-is-born

    • The approach of putting the unwanted liabilities in one company, and the better stuff in another company has been used for years by insurance companies in poor financial condition. I didn’t realize that approach was being used on pensions as well. Or that old pension liabilities could be put in a new company.

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