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.

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The Close Tie Between Energy Consumption, Employment, and Recession

The number of jobs available to job-seekers has been a problem for quite a long tine now—since 2000 in the United States, and longer than that in Europe. If we look at the percentage of the US population who are employed, it is now back to 1984 or 1985 levels.

Figure 1. Total number of individuals employed in non-farm labor, and reported by the US Bureau of Labor Statistics, divided by US resident population, as reported by the US Census Bureau.

I have run into a number of clues about what is happening. In this post, I’d like to discuss what I am seeing. Part of the problem is that high oil costs squeeze the economy, reducing employment. Part of the problem is growing trade with Asia. It is even possible that the Kyoto protocol (which the US did not sign) has something to do with what we are seeing. Let me start by explaining a fairly strange relationship. Continue reading

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

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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