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Petroleum Demand in Developing Countries
Posted by Robert Rapier on August 10, 2012 - 12:50pm
Note: This article was originally written for World Business Magazine in Singapore, and explores one of the themes I covered in my book Power Plays.
Ed. note: This post first appeared on Robert's blog R-Squared Energy.
Oil Prices Rise, But Demand Growth Remains Strong
Access to affordable, stable energy supplies is critical for economies throughout the world. For developing countries, affordable energy can offer a pathway to a better quality of life. But between 2000 and 2010, world oil prices became much less affordable. The average global oil price advanced from approximately $25 per barrel to more than $100 per barrel – far outpacing rates of inflation in most countries.
Many books and articles have been published that argued that the increase in prices has been due to oil speculation, the restriction of supplies by OPEC, growth in developing countries, peak oil, or various geopolitical factors. Regardless of the cause, the response to higher prices in developed and developing countries may be surprising.
Conventional wisdom might suggest that as oil prices rise, developing countries would be less able to afford oil, leaving wealthier countries to bid against each other for increasingly higher-priced supplies. But that is not at all what happened over the past decade, and the trend may give developed countries a reason for concern.
From 2005 to 2010 – a period that saw oil prices rise to record highs – oil consumption in the United States fell by 1.6 million barrels per day (bpd). Other developed regions experienced similar trends. The European Union saw oil consumption drop by 1.2 million bpd, and Japan registered a drop of 900,000 bpd.
Japan was the exception in the Asia Pacific region. Excluding Japan, the rest of the Asia Pacific region increased its oil consumption by nearly 4 million bpd even in the face of the strong oil price increases from 2005 to 2010 (see Figure 1). Over the decade, Asia Pacific oil consumption increased by nearly 7 million bpd.
Strong Growth in All Developing Regions
But even though the developing countries in Asia Pacific saw a nearly 50% increase in consumption over the decade, it wasn’t even the fastest growing region. That distinction belongs to the Middle East, which added 56% to their oil consumption between 2000 and 2010. The Middle East’s total increase in consumption was smaller than that of Asia Pacific at just under 3 million barrels per day, but that is primarily a function of the relative populations of the regions. OPEC countries like Saudi Arabia saw the strongest demand growth in the region. This is understandable considering that the high price of oil brought a huge influx of cash into oil exporting countries, and countries tend to increase their oil consumption as they become wealthier.
Demand growth was strong in other developing regions as well (see Figure 2). Africa increased consumption over this timeframe by 850,000 bpd, a 35% increase. Consumption in South America increased by 1.2 million bpd, a 26% increase over year 2000 levels. Thus, despite drops in consumption among most developed regions, global oil consumption over the past decade rose by nearly 11 million barrels per day.
The trend was clear: As oil prices increased, developed countries reduced oil consumption, while regions that were significantly undeveloped or developing increased oil consumption. Perhaps unsurprisingly—since their revenues would have increased over this time period—oil-exporting regions experienced the greatest percentage increases in consumption. In addition to the Middle East’s 56% increase in oil consumption over the decade, Venezuela saw oil consumption increase by 37%.
Explaining the Demand Changes
But why would developing oil-importing regions have also experienced consumption growth as oil prices climbed to record highs? Consider the change in the consumption habits of the United States and China over the past decade. In 2000, the U.S. consumed 19.7 million barrels of oil per day—25.5 barrels of oil per person per year. By 2010 the population of the U.S. had increased by 10%, but the country’s oil consumption had fallen to 19.1 million bpd—22.6 barrels per person per year.
The trend in China was sharply in the other direction. In 2000, oil consumption in China was 4.8 million bpd, or 1.4 barrels per person per year. In 2010, consumption had grown to 9.1 million bpd, or 2.5 barrels per person per year. Incidentally, if per capita oil consumption in China was as high as it is in the U.S., China would consume more than 82 million barrels of oil per day—an amount equivalent to almost all of the world’s oil production.
Oil demand growth in China, in India, and across Asia and South America in the face of record-high oil prices may at first be counterintuitive. But consider the consumption patterns in developed countries. Developed countries consume a lot more oil than they really need because they have more discretionary consumption. Thus when oil prices rise, consumers in developed countries make a few lifestyle changes—driving fewer miles, buying more fuel-efficient cars, using more mass transportation, etc.—and oil consumption falls.
So the 22nd annual barrel of oil consumed by someone in the U.S. isn’t worth $100 to them, and they use a bit less when oil prices rise. If oil prices were sustained at $150 a barrel, they would use even less. But the vast majority of the world uses very little oil, and aspires to higher standards of living. The average consumption of oil in the world—87 million bpd in 2010 (Source: 2011 BP Statistical Review of World Energy) divided by a population of approximately 6.8 billion people in 2010—is 4.7 barrels of oil per person per year. In other words, if everyone on earth was allocated an equal amount of oil, the 2010 allotment would have been 4.7 barrels per person. This is 79% lower than average U.S. consumption, and 54% lower than average EU consumption.
Developing countries are presently below the average 4.7 barrel allotment, but their consumption is rising. Chinese consumption has risen to 2.5 barrels per person per year, a 79% increase in the past ten years. At that growth rate—and assuming China’s population remains constant—China will reach 4.7 barrels of oil per person in slightly over ten years. But this would require another 8 million barrels of oil per day for China, which either must come from the allotment of other countries—most likely developed countries—or would require global oil production to rise another 10%.
Bear in mind that this is only for China; other developing countries are also on growth trajectories that would see their demand for oil collectively increase by millions of barrels per day over the next decade. The threat for developed countries is clear: As oil prices rise, consumption in developed countries is likely to continue to decline in response, but developing countries could continue to increase their consumption and still grow their economies. To the extent that the consumption decline in developed countries is a result of the adoption of alternative fuels and improved efficiencies, economic growth in developed countries may be able to continue. But if the decline comes as a result of people simply being unable to afford oil, economic difficulty in developing countries is practically assured.
Implications for the Future
What might this signal for future oil prices? A question I frequently encounter is, “How high could gasoline prices ultimately rise in the U.S.?” Because the oil markets are global, the answer to that question is, “It depends on how much value people in developing countries place on increasing their oil consumption to two or three barrels of oil per year.” Or, an alternative way to think about it is, “If you were only allocated 3 barrels of oil per person per year, how much would you be willing to pay for those barrels?” The 20th barrel the average person in the U.S. consumes each year might allow us to drive that 12,000th mile. But the first barrel that someone in a developing country consumes might allow them to drive that very first mile and have heat in their home for the first time. They will be willing to pay a lot more for those initial barrels than we are for our excess barrels, and this explains why their consumption has increased even as oil prices have risen.
And if future oil prices are dictated by how much developing countries are willing to pay for their second or third barrel of oil per capita, this number may ultimately be much higher than $100 per barrel. This is a major reason that I don’t ever foresee a sustained return to cheap oil. There are many who have placed most of the blame for increased oil prices on speculation, but the thirst for oil in developing reasons means that there are fundamental issues of supply and demand at work as well.
Conclusions
The developing world–and in particular Asia Pacific–will play a very important role regarding global energy supplies and global carbon dioxide emissions. With respect to energy supplies, developed regions should recognize the likelihood that this growth will keep upward pressure on oil prices over the long term, and governments would be wise to pass policies that encourage lower fossil fuel consumption. In developing regions, governments must recognize that future growth will ultimately be slowed by rising prices unless alternative energy sources become an increasingly greater part of the mix.
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Thank you. This puts the matter squarely for advanced countries: 'our' 'discretionary' use of oil is changing, whatever the effect on our economies, and decline seems fairly uniform across our economies.
I spent a little time (again) just now using import/export databrowser ( http://mazamascience.com/OilExport/ ) and it is interesting that the continuing rise in oil use across Asia Pacific is very population-specific. I looked at India, Pakistan, Bangladesh, Indonesia, Philippines, Tailand, S Korea, Taiwan, Vietnam, Malaysia as well as China [edit: although S Korea hardly qualifies as a developing country]. In several countries the rise of the other energy sources, particularly coal and NG has been even more dramatic than that of oil in the last decade. Oil use in some has recently stalled or declined (these include S Korea, Indonesia & Philppines). China and India - more than 2.4 billions - see recent spectacular increases in coal as well as a continuing rise in oil consumption, while Indonesia struggles now to keep total energy use constant despite the dramatic rise in Indonesia's coal consumption. (Oil and NG, predominant in Indonesia's early increase in energy consumption, have both stopped rising.) [small edit]
The economic value-added by transport seems only matched by the value of electricity, but there are other factors in the mix?
Other factors: government subsidies.
http://crudeoilpeak.info/nigeria-fuel-shortage
Some developing countries will also run into trade deficit problems and/or currency reserve problems, depending on the convertibility of these currencies.
Matt is raising a very significant point. Rising prices on the global market don't matter if you're not paying the global price. Countries where the price of oil is subsidised should therefore be analysed separately from countries where the global price applies.
Your explanation for the change in demand for developed countries may be right, on average. But most people reduce their petroleum use through big one-time decisions: new furnace, new windows, civic instead of suburban, ect - not from deciding to walk to the market instead of drive. Given that developed countries create the technological innovations that increasingly do more with less, the drop in demand might be expected from developing countries via first adoption these technologies.
snake - That's a valid point but it seems to address more the issue of efficiency than absolute consumption IMHO. One example immediately comes to mind: telephone service in China. It was obviously much more energy efficient to expand service via cell towers than trying to hardwire billions of people. OTOH expanding cells to cover billions who previously had no phone service took an increase in energy comsumption...not a decrease. Likewise the Chinese may be buying some of the most fuel efficient vehicles on the planet. But they aren't replacing gas-guzzlers for the most part but adding new demand. The same might be said for the Indian Nano: very fuel efficient but they seem to represent an addition and not a more fuel conserving replacement in many cases.
Do more with less is good. But doing more than they were doing increases demand...doesn't derease it.
Chinese and Indian new cars may be efficient by US standards, but less so by European. The Nano is designed to be cheap to buy, not particularly cheap to run. Fuel is not taxed at the 200% level seen in Europe, it is even subsidised to a greater or less extent. Even in Europe, it is only the upper income bracket that buy new cars. They keep them for 3 years and then buy a shiny new one. People who can afford new cars can afford to buy the fuel to run them. The people who can only afford second hand (used) have to put up with what the wealthy cast off.
I bought a frugal diesel car ( 70+ mpg Imperial) but the extra cost to gain that level of efficiency will take 5+ years to repay itself over the standard model at $10 gallon for fuel. Most people will just buy the most luxurious car they can finance.
Just to mention. Nano was a failure in INDIA.
"But they aren't replacing gas-guzzlers for the most part but adding new demand."
I should have read your reply first, because that's what I just said as well.
That doesn't have to be the case: EVs don't need liquid fuel; EREVs can reduce fuel consumption by 90-95%, to the range where biofuels can scale.
Just because something doesn't have to be a certain way doesn't mean it won't be that way. Even if they made a huge and rapid commitment to EVs right away, the momentum in the system is going to keep their oil demand rising for some time.
Actually, electric bikes out-sell light vehicles about 2:1 in China.
Also, Chinese car sales may look large, but the average miles per vehicle (VMT) is dramatically lower than in the US.
Diesel electrical generation is a very large component of Chinese oil consumption, and that can fall fairly quickly as their grid becomes more reliable and catches up with demand (partly because of the sudden economic slowdown in China).
In any case, the point here is that the idea that oil consumption has to rise along with GDP (or increased driving, for that matter) is not accurate.
Given that developed countries create the technological innovations that increasingly do more with less, the drop in demand might be expected from developing countries via first adoption these technologies.
The reason that's unlikely is that what's really happening is a person in a developing country would go from no car to a fuel efficient car. They aren't downsizing; they are coming up from next to no consumption.
I do think further declines in the U.S. are likely if oil prices remain high. After all, how many gas guzzlers do you still see on the road? A lot.
But why, rhetorically, did this increase in oil consumption occur at $100 per barrel instead of back when it was $20? It certainly would have been more productive.
bryan
Normalized oil consumption for China, India, (2005) Top 33 Net Oil Exporters and for the US, 2002 to 2010 (BP). The trends continued in 2011. Note that annual Brent oil prices rose from $25 in 2002 to $111 in 2011, with one year over year decline, in 2009. (Robert made the same point in Figure #1.)
Available Net Exports (GNE/CNI ratio)
The following graph shows the GNE/CNI ratio (ratio of Global Net Exports* to Chindia's Net Imports**) versus Estimated post-2005 Available CNE*** (Cumulative Net Exports).
Available Net Exports = GNE less CNI.
In 2005, there were 8.9 barrels of GNE for every barrel of oil that Chindia net imported.
In 2011, there were 5.3 barrels of GNE for every barrel of oil that Chindia net imported.
The significance of this trend would seem to be obvious. At a GNE to CNI ratio of 1.0, the Chindia region alone would theoretically consume 100% of Global Net Exports of oil.
An extrapolation of the six year 2005 to 2011 decline in the GNE/CNI ratio suggests post-2005 Available CNE of about 168 Gb.
There are about 157 net oil importing countries in the world. An extrapolation of the 2005 to 2011 data suggests that the total post-2005 supply of Cumulative Net Exports that will be available to importers other than China & India could be about 49% depleted as of the end of 2011.
*GNE = Net exports from top 33 net exporters in 2005, total petroleum liquids production less liquids consumption, BP + Minor EIA data
**Chindia's Net Imports = Total petroleum liquids production less liquids consumption, BP
***I projected the 2005 to 2011 rate of decline in the GNE/CNI ratio to estimate when the GNE/CNI ratio would theoretically equal 1.0, and I then estimated the area under the triangle, to get estimated post-2005 Available CNE of about 168 Gb.
When oil was $20 the average Chinese worker did not have the capital to buy a new car, and there were no old cars on the market. Finance was not an option By working hard and selling trinkets to the US/UK/Europe, they got the capital to buy the big ticket, fuel hungry item. Oil consuption growth in China is a result of economic productivity, not the cause of it.
"But why, rhetorically, did this increase in oil consumption occur at $100 per barrel instead of back when it was $20?"
Actually the graphic shows that it did increase at all prices; from $20 to over $100. It was as if demand there was immune to price signals; it increased steadily regardless of whether oil was $25 or $100.
I have no doubt that oil demand would be reduced there at some price, but that price may be extremely painful for Western economies.
Robert
How much of China's steadingly increasing oil consumption has gone to building economic production (mostly essential transport)? The increase in the number of cars and personal mileage is very recent indeed I understand. You made the point about a different kind of oil consumption in the developing world, especially China. One guesses this is still largely true, and gives us a better picture of their changed bargaining power.
Phil
But the price wasn't immune to demand signals.
This condition shows clearly that the price rise was caused by increased demand.
But you might expect to see demand start to flatten as the price climbs high enough. It never really did that.
Of course demand actually declined in the developed world as you have shown. But a large number of people in the developing world are just beginning to discover the tremendous advantage of fossil power over animal or human power.
We will be unable to continue wasting resources as these others bid up the prices for their basic needs.
It has already been pointed out that the consumption increase occurred at both $US25/barrel and $US100/barrel. It should also be considered, though, that the relationship also works the other way. With global oil production increasing in the last decade, but doing it slowly, the price has been driven up by strong economic growth in the Third World. With more money in their pockets, the people of India, China, Brazil etc are spending that extra money, in part, on increasing their oil consumption. This bids up the price of limited production.
The analysis needs to include who is using more or less crude oil: government, business or residences. It would also be useful to look at per capita oil consumption to eliminate population changes as a cause, and Matt's suggestion that countries whose price of gasoline is subsidized be analysand separately from countries whose consumers pay the fluctuating rate from the global market. Developed countries have been exporting their manufacturing to developing countries during the time frame being considered.
Robert,
Thanks for this - logical and understandable.
It would be interesting to see a chart of specific oil consumption (bbls / person) over the period 2000 - 2010 for each of the regions in figure 2. It would be even better if was GDP correlated (bbls / $GDP-per-person) :)
Andrew McKillop has argued for many years that, up to a certain price level (perhaps $75), increases in oil prices would drive world economic growth, not reduce it. See, for example, these articles from 2003:
A counterintuitive notion: economic growth bolstered by high oil prices, strong oil demand
and this article
Price signals and global energy transition (pdf)
where he says:
He explains his belief that high oil prices benefit not just oil producers, but commodity producers too:
I believe that there is yet another explanation which adds to this. The world's reserve currencies, ie. mainly the US dollar, but also the euro, the yen and the British pound, are the currencies of oil-importing nations. When the price of oil increased sharply in the years leading up to 2008, this contributed to large increases in trade deficits, particularly of course in the United States. This meant that lots more dollars were sent abroad, a large proportion of which ended up with foreign central banks, such as in China. Since China and many other developing countries have a policy of linking their currency to the dollar, the increase in dollars in circulation meant that they had to print more yuan to keep the value of their own down. The putting of more yuan into circulation inevitably increased economic growth in China, which ultimately increased Chinese oil consumption. This increased oil demand, resulted in higher oil prices, which contributed to the US deficit worsening, more money in circulation, etc....
Coilin - An interesting perspective...thanks. I'm not sure how appropiate it might be but as I re-read your post I envisioned a snake getting fatter by swallowing its own tail. Obviously the feedback loops are much more complicated. But can't shake that image.
That's a very appropriate image! Pretty much describes the process. Like it's said, there's a limit and it looks like we're past it.
That the price elasticity of demand is depended on relative levels of consumption does seem to make good logical sense.
Can we take this a step further and assume that in a global economy, efficiency factors are going to apply forcing factors that will tend to average out average per capita usage and that fighting that trend will cause serous economic down sides.
rye - take this with a grain of salt given it's a geologist talking economics. But a while back someone (wt/Ron?) pointed out that price competition isn't going to be on a level playing field. Say a US firm has the capital to match or exceed the capex capabilities of a Chinese company. But given a number of advantages (lower labor costs/govt subsidies and tax breaks) the Chinese company can convert that oil into a higher rate of return and thus be able to pay more for the energy than the competition. And that could be the case even if the Chinese are less efficient in its utilization. Similar to why EROEI is not directly relevant to an oil company decision making process. Efficiency may not be the controling factor in the "undeveloped" oil consuming countries.
Sorta like bending over to touch your toes: some of us are more elastic than others.
Yes, so the average Chinese worker uses energy more efficiently, that is lives life at a lower demand level and so can provide his labor at a lower cost.
The average American worker has a huge energy demand and must command a higher average wage if he is to maintain that level of energy inefficiency.
So it seems that being able live a happy, contented life at a lower energy demand level than your competitor would give you an advantage.
I wonder if, when the crunch comes, the Chinese worker will be worse of than the American because of that economy. He has less room to cut back. It is harder to cut fuel consumption when riding a motorcycle with the other 6 members of your family on board than a RAM 2500 hauling just yourself.
NAOM
The crunch is coming because of a change in purchase ability. The Chinese family of 6 is experiencing expanding purchase ability. The fuel/maintenance needs of the motorcycle is a declining burden for them and they are considering buying a small car. The American is experiencing a decline in purchase ability and is finding that the cost to keep that big gas hog truck is becoming unmanageable.
For me the bigger issue is how we define, "worse". If having of lots of extraneous materialist possessions is one's life goal, how one derives one's happiness, then maybe you are right. At least you can sleep in the truck when you can not longer afford to drive it.
What Chinese family of six? China adopted a One Child Policy in 1978:
http://en.wikipedia.org/wiki/One-child_policy
The Total Fertility Rate (TFR), which is the best indicator of underlying population trends, has been well below the replacement rate of 2.0 for quite some time and, according to the 2010 Census, was 1.4:
http://en.wikipedia.org/wiki/Demographics_of_the_People%27s_Republic_of_...
You're a lot more likely to find a family of 6 in India, but even there, the TFR is 2.58, which translates into a family of 4 or 5.
There is a lot of alarmist nonsense written about a so-called "population explosion". In reality, the global TFR has been trending down for decades. Even in the countries with the highest TFR, it is coming down steadily. The world has a population problem, and it will get worse before it gets better, but it's not out of control. Provided we can deal with the social problems that dictate massive resource wastage in Western industrialised countries, we can handle it. In short, the problem is not the teeming masses of the Third World. The problem is Detroit.
Nonsense. What you see in this graph is a population explosion by any stretch of the imagination. I was born in 1938 and I have seen the population of the world triple in my lifetime.
No, no, no! The population problem is the teeming masses of the Third World! Of course we are a problem as well. We pollute and use up most of the natural resources. The teeming masses of the third world don't pollute near as much as we do but they do cultivate the earth, turning land into desert. They do draw the water tables down, they kill the wild animals of the forest for bush meat and they have a lot more babies. We are all the problem.
Soon, with declining natural resources such as oil and water, we will see a declining food supply. Then those teeming masses will get very hungry, some will just die but others will start to riot, they will overthrow their governments but that will not get them any more food than they had before. I have no idea what they will do then but it will not be pretty.
Understand, no one is to blame for the population explosion, it is just in our nature. We homo sapiens are competing with every other species on earth for territory and resources. And we are winning... big time. We are killing off other species as if there were no tomorrow. And for those species there is no tomorrow.
And it will get worse, very worse when the collapse happens. We will eat the songbirds out of the trees.
Ron P.
Darwinian's contribution is a perfect example of what I was talking about. The graph he reproduced from the Population Reference Bureau is a textbook example of alarmism, using selected facts to produce an impression which is at odds with reality.
Population increases since the Paelolithic Era have been enabled by successive technological developments, which allowed food production to increase over time. The introduction of capitalism in the 17th & 18th Centuries produced a substantial acceleration of population growth by speeding up technological change. Even the dismal Reverend Malthus recognised this. He accepted the reality of the growth of food production, but argued that population growth would exceed it. The amalgamation of different periods on the graph, therefore, hides important discontinuities and is a barrier to rational analysis.
The second problem with the PRB graph is that it is not using an exponential scale. If there are large changes in a variable over time, and the change over a given period is related to the size of the variable in the previous period (as is the case for population), an exponential scale allows for much better understanding of trends. In particular, it allows one to see where population increase is slowing down and heading towards a turning point.
The third problem is that looking at the population itself is a very poor way to predict the future. It's like trying to navigate with no maps or signs, but only mileposts. Population change is the product of many factors, which manifest themselves as both a birth rate and a death rate. And the birth rate itself is the product of how the Total Fertility Rate manifests in the context of the specific age and sex distribution in a given country or the world as a whole.
Obviously, the world population has grown because, over many years, the birth rate has exceeded the death rate. It is usually not appreciated, however, that the major change in these variables since the Paleolithic Era has been in the death rate. Basically, people are living a lot longer and, most importantly, far more of the children who are born survive to have children themselves.
It is this last phenomenon which is both a driver of the massive population growth in the last century and the cause for optimism. It is a cause for optimism because, outside of massive economic calamities, the single biggest factor leading to a large reduction in the number of children a woman has is her confidence that they will outlive her. While a fall in infant mortality leads to a population increase, a society which has grown to expect a low infant mortality rate will produce far fewer children.
To understand where global population is going now and will in the next 50 years, the key figure that must be understood is the Total Fertility Rate (TFR). This is:
http://en.wikipedia.org/wiki/Total_fertility_rate
If the population was in a pattern of long term stability, with minimal infant mortality and no pipeline effect from previous higher rates of birth, it would have a TFR of 2.0. That is, the average woman would be expected to have 2 children - no more and no less. Here is the table of global fertility rates, reproduced from the Wikipedia article:
. Period TFR
1950–1955 4.95
1955–1960 4.89
1960–1965 4.91
1965–1970 4.85
1970–1975 4.45
1975–1980 3.84
1980–1985 3.59
1985–1990 3.39
1990–1995 3.04
1995–2000 2.79
2000–2005 2.62
2005–2010 2.52
2010–2015 2.36
This table tells a completely different story from that of Darwinian's graphs. From it, one can extrapolate that the global TFR is set to drop below 2.0 before 2030. Of course, population will continue to increase after that point, because the generations which are dying will be much smaller than the generation having children in 2030, but this is a pipeline effect which will play itself out over time. Population could also increase because of increasing life expectancy, but that is something which should be seen as a plus, not a minus. The total global population is expected to max out at about 9 billion in about 2050 and start decreasing slowly after that.
Darwinian and other doomers would, I am sure, state that a global population of 9 billion is unsustainable. I agree with that. To be more precise, I agree that it is unsustainable indefinitely, but I do think that the planet's carrying capacity can be exceeded for a while. This is particularly since so many of the resources currently consumed are wasted in profligate ways by governments and corporations in industrialised countries. Consumers, too, are often wasteful, but they operate within the framework set up by corporate capitalism and are merely following the example of their masters.
To return to the point I made in my previous post, the problem is Detroit. Certainly I am in favour of sensible efforts to bring birth rates down in Third World countries (the education of girls and the ready availability of reliable contraception are both excellent initiatives that need spreading), but this is a battle that we are winning. We are not winning, by a long shot, in adopting environmentally sustainable practices in industrialised countries. We need nuclear disarmament and a turn away from militarism, we need an end to the domination of the private car in transport, and we need cities that are fit for human beings to live in. To get there, I believe we need to get rid of capitalism - but discussing the whys and hows of this would take us far from TOD's mission.
Ron, IMHO, is not wrong to be alarmed. But...
( I am only a couple of years younger than Ron so am similarly qualified as a witness ;) )
My British great grandmother's generation (in our case, according to family letters, mostly fecund agricultural labourers) had a fertility rate comparable with highest present African rates, just about the time Britain had approximately trebled its population between 1750 and 1850. By my mother's day, however, the rate was much reduced, but at >3 was still well above the replacement rate. By the time of my wife’s generation, fertility was at or below TFR of 2.0.
Agricultural production had trebled in Britain from 1750 to 1850 using modern organic agriculture and horses (well before synthetic or mined NPK), but after that date Britain’s still growing population increasingly imported calories from the farming expansion in the New World and Australasia, until by 1939 imports accounted for 70% of our British calories. Despite an increase in our agricultural yields/acre through WWII and their further rapid expansion again after 1960, (fossil fuels and fertilizer) Britain still imports a substantial fraction of its food.
I count both of you correct.
I taught the subject of exponential growth and population to teenagers in the 1960s. By the late 1970s it seemed clear to me that any attempt by the majority of the world's population to emulate American standards of living was simply ludicrous. In Ron's famous phrase: "it just isn’t going to happen".
Most of the downsides of population growth mentioned by Ron are happening and will get a lot worse, but at the moment much of the forest and habitat destruction occurs as more affluent populations or affluent fractions of populations (who can afford it) increasingly import natural resources in to their economies. [edit: e.g. forests particularly in the tropics are converted into cash crops of many kinds] And most of the recent expansion in fertilizer use goes to increasing meat consumption, biofuels and upmarket horticulture. (I put some numbers for food and fertilizer trends into a two-part guest post on TOD March 2008.)
best
Phil
Phil, do you actually think this matters? The forest are being cut drown, and all the other things I mentioned in my reply to Ablokeimet below. Anyway both the developed world and the undeveloped world are responsible for forest and habitat destruction. Ethiopia was deforested by the natives cutting down trees to make charcoal for sale in the cities. Ditto for Haiti. Madagascar is being deforested for timber. It simply does not matter who is doing it, it is all going away.
Ron P.
Ablokeimet, charts are just charts, they show nothing except history. And of course when the chart extends into the future we all know that is just someone's guess, a curve fitting of past trends. It means nothing.
Showing population growth on an exponential graph is a way of hiding the true growth in population. Almost everyone knows this and that is why no one ever uses an exponential graph to show population growth. Go here, Population Growth Charts, and you will find several hundred population growth charts but not one exponential chart. Demographers of the world do not bend to the will of those who wish they would use different kinds of graphs.
I agree, as I said, projecting the same curve into the future is nothing more than curve fitting. You expect the curve to level off, stay flat for a long time, then gradually turn down. No, that just ain't gonna happen, the curve will turn down in the next couple of decades and drop sharply for about a hundred years. The curve will go down just as fast, or faster than it went up.
And your "Period TFR" table is also nothing but curve fitting. You expect the decline in fertility rated to continue on its current path until it flattens and eventually turns down... very slowly. The population of the earth will never reach 9 billion people. We are already deep, deep, into overshoot. 7 billion people are unsustainable. At 7 billion we are drawing down water tables, using up topsoil, depleting ocean fisheries, using up oil and other natural resources, causing rivers to run dry and natural inland seas like the Aral Sea and Lake Chad to dry up, cutting both rain forest and dry forest at an alarming rate, causing deserts to expand, causing species extinction, changing the climate and I could go on and on. We are literally destroying the earth and turning it into a wasteland.
That opinion is laughably silly. Detroit is a result of the industrial revolution, not a cause. And capitalism is not a cause either but a result of human efforts to increase their well being. The things we do are the result of our nature, not an ultimate cause.
Of course people are wasteful. It is in the nature of people with more wealth to waste some of it. But, according to your reasoning, if they would just stop then we would have enough to go around. That is like saying that if people would just stop being dishonest and committing crime then we could get rid of all our police forces. People will not change their nature because someone points out the problems their nature is causing.
Also, capitalism is a result of our natural greed. It has been around for thousands of years. All merchants and traders were capitalist. Countries that have tried to outlaw capitalism have always failed. And as they adapted more and more capitalism, like Russia and China, the more prosperous they became. That is not to say that capitalism is not a problem, it is. But it is simply a result of our nature and not a cause.
Ron P.
Also, there are very pronounced ELM type effects when it comes to food exports, perhaps even more so than for energy.
How did 'Export Land Management' get its title? I can understand the 'Export' bit but am confused over the rest though I can understand its significance.
NAOM
It's Export Land Model, not Management. It is the model that describes the how and why of declining exports from Exporting Countries, or Export Land as opposing Importing Countries or Importing Land.
At least that's why I think the word "land" is used. It was discovered by Jeffery Brown, (Westexas) and Sam Foucher and If I am not correct about why the word "land" was used I am sure Jeff will correct me.
Anyway you can google it and get thousands of hits if you are wondering what it is.
Ron P.
Peak Oil Versus Peak Exports:
http://www.energybulletin.net/stories/2010-10-18/peak-oil-versus-peak-ex...
I for one will like to see this become part of TOD's mission, I miss the campfire section and would like to see it return. Mindset issues would seem to be at the core of our problem/predicament and I know of no better forum to discuss this within than here.
bwt, I was using the word "family" in a loose sense in an above post and did not mean to imply 2 adults and their 4 children. I was thinking more extended family. I do agree that two issues, our ecological footprint and raw numbers together create the problems we face and both need to be addressed.
You both wish TOD would adopt an idealism. What would that idealism be? Well, the opposite of capitalism obviously. That would be communism. Of course it would not be any kind of communism that has ever been tried because they all failed. And it definitely would not be North Korean type of communism because those folks are literally starving. It would have to be ideal communism! Yes, ideal communism, that's the trick. Ideal communism, whatever that is.
You guys kill me. The world is heading for total economic collapse because of overpopulation and declining natural resources. But you want to change directions and create utopia by changing the nature of human behavior and converting the world to your ideal form of government.
Lotsa luck with that one.
Ron P.
Yes, I guess you got me there. For the most part I am a doomer but there is a small part of me that has a little hope. My idealist notion is that there are two major archetype influences that control behavior. The two are competition (win,lose) and cooperation(win,win). It seems clear to me that damage being done is motivated by the ego build people get from engaging in win,lose interactions. I think it is a learned behavior and could possibly be changed.
How has capitalism (the worship of sociopathic economics) become so sacred and communism (work together for the common good) become so demonized. And is there no possible other option available.
We both agree that we are headed for the big bad brick wall, but yes I do suggest that we consider changing directions. I feel that the best way to approach that would be to change the dysfunctional human behavior that is driving us toward maybe total destruction. I would expect a better government will natural evolve if some needed changes in our mindset can happen.
Guy – That’s OK. Hang around a while and me, Ron and a few others will crush that last little bit of hope out of you. LOL.
I’m not offering a blanket defense of capitalism but it has provided a good life for many, many millions over the decades. And left many behind in the process. But as Ron points out communism has done worse. Even today many millions suffer under dictatorships hiding behind the mask of communism.
So let’s start anew and replace them both. But with what? And even if someone came up with that magic bullet how would it be forced onto the current system? And I don’t use the word forced lightly. Neither communism nor capitalism are natural phenomenon. They are constructs of TPTB with public support…at least initially. Or for this dedicated doomer it isn’t a question of there being a better system to manage our future but how could any meaningful change be forced into existence?
IMHO in the end only Mother Earth has the power to force those changes upon us. And we will still go kicking and screaming into that goodnight blaming everyone/thing but ourselves.
Hi Rockman
I have been hanging around here for awhile, just do not post very often. I read fast but I am a painfully slow writer. Right now I dealing with an unknown urinary track issue and it hurts if I move around too much, so sitting still and posting can be done without pain...
I definably agree that trying to force everyone to accept a certain system is not a good approach. I'm not even wanting to advocate any particular system, the system is really secondary anyway. What I am proposing is more an educational outreach type of effort that hopefully would result in a voluntary, of the free will, mass group mindset reorientation. I feel that if we truly understood the psychology behind our behavior the change would happen.
Without that mass mindset change, among other things that we accept that we are responsible, the natural consequences of our arrogant behavior will be our teacher, we agree. Many here seem to feel that this is too far off topic and should be discouraged. I can think of nothing more relevant.
I get the impression that many people did not understand this post and I suspect it is because what is being said here is so alien to their present mindset. It is in opposition to some deep seated beliefs. If TOD wants to make a difference, it needs to address mindset issues.
Out-of-control population follows a bell curve. The rate of increase slows down, after the inflection point on the rising edge, as the population approaches the peak. In-control population is approximately static, that is, a horizontal line on the graph.
NAOM, I've had that thought in the back of mind since my first trip to Brazil in 1979. It was clear that the middle-class American lifestyle could retrench a long way and still match the middle-class Brazilian lifestyle. As a middle-class American I've always taken a lot of consolation from that thought - I know that I can cut way back on my standard of living and still be doing just fine. Today I can sit on the subway; in the future I'll have to stand because lots of current drivers will be pushed off the road by fuel prices. I can take a little crowding - it'll still be better than the buses in Recife 30+ years ago.
The Chindians will be able to outbid the US for its fuel simply because there's enough of them to pool enough together to buy a neighborhood's worth of gasoline stockpile whereas we Americans will be unable to afford or even find enough fuel to put into our SUV's belly so we can drive to Walmart and buy a plastic pumpkin. Even if we got smart, and downsized to a shared motorcycle and fuel pool, the Americans will still be screwed because there's not enough Americans even if they were unnaturally friendly to outbid the Chindians who've spent their entire lives sharing and "getting along."
Consider the Iranians - the rest of the world has enabled their eventual independence by the continued sanctions imposed on them insulating them from the ruinous effects of globalism - it's been discussed here on TOD how it may very well be the Iranians will be the last ones standing when the axe falls, the crunch hits, TSHTF. Too bad no-one gets along with them.
-Matt
From an inexpert stance, I would tend to agree with that. But I think that a more important driver is the retreat from efficiency which I see coming.
I think that we have a highly efficient but highly fragile global economy. For example, VW returned a deposit on a car because of Fukushima (friend of a friend), because a part or subsystem was no longer available, as I was told. I suspect that "just in time" efficiencies soon will be seen as "just in time liabilities". When that happens, reserves will be acquired, and filling those reserves will increase demand regardless of price. People may even prefer fuel to ammunition. In other words, demand will become inelastic, and oil will be the first casualty.
Just occurred to me: that looks a lot like a positive feedback loop. Higher oil prices will drive oil prices higher, at least for a time.
Any thoughts?
I am using the word "efficient" in a more macro sense here and confined to within the scope of non renewable resources.
Higher prices due to higher prices, yes if you mean higher prices due to higher cost. Short term inelastic, sure can be dramatic, but long term, hard to predict, too many unknowns. I do feel that this post does a good job of pointing out some important aspects with the demand side of this issue.
I agree that higher prices mean higher costs, but I was thinking of something else. That is, when people, corporations, and nations begin to stockpile, then the demand for everything goes up, and prices go up. The higher prices go, the more panic about scarcity, which feeds demand ever higher, with resultant higher prices. That is the positive feedback loop I was referring to.
Do not see this as a big issue, long term, because liquid fuels are prohibitively expensive to store in quantities needed to control the market. Even the build up and release of national reserves cause modest short term effects. The closest we see is when national producers cut back production, leave it in the ground, and this can have long term effects but market forces tend to limit this to relatively modest levels of price increases.
Don't agree. What happens when everyone drives about with a full tank of gas? And that is just the tip of the iceberg - since everything is made (partly) of oil, accumulating any class of manufactured asset will result in higher oil demand.
Sure, short term everyone topping off there gas tank causes spot shortages, but long term the ability to arrange payment will fail long before we run short of the potential to buy.
Look back and read some of the post/comments leading up to the time when crude peaked at somewhere around $147. A few brought up the concept of demand destruction, but mostly it was about supply constraints. Few addressed the issue of ability to pay and how that would moderate demand. The assumption was price would continue to rise, people would somehow buy it. They could not, did not and prices fell.
This is a thought-provoking article but I actually disagree with some, though far from all, of your points, Robert.
First, as you pointed out, the developed world can cut back on oil use. This is most especially true for America, which also sees rising domestic oil production.
Nonetheless, at some point energy efficiency is a lower share of the oil consumption reduction than simply economic stagnation.
My point, however, is that the developed world does not actually have much of a choice. Many of these nations, as you pointed out, are so poor so that unless they have a terribly bad political leadership, then they will automatically enjoy very high growth rates and FDI(foreign direct investment).
This gives them a cushion, but it's merely a temporary cushion. If the developed world would face this prolonged period of economic stagnation then the world economy will falter, because the Western world still accounts for a very large part of economic GDP. Countries like Brazil have seen their growth rates literally plunge from 7.5 % last year to a predicted 1.8 % this year.
India has gone from hovering around 10 % to reaching abysmal 5.3 %.
China is manipulating it's numbers. Even the incoming PM, said to the U.S. embassy according to leaked Wikileaks cables in 2007 that he personally 'ignores the GDP data, they are manipulated'. He then went on to describe a few metrics he watches, including eletricity growth(which is now near 0 % after being around 10 % in the beginning of 2011).
China's real growth rate now is not 0, but it's not the official number either.
My point is that to achieve the growth rates that the developing world requires, the developed world needs to be on a decent path. During the 2000-2010 period, the developed world was not in much trouble except for the 2008 crash. The dotcom bubble was relatively mild and did not spill over that much.
Going forward, as record debts weigh in on the developed world plus a very high energy floor for prices, there won't be as much demand for the world economy, hence they see much lower growth rates.
They have lower debts, perhaps, but also far lesser capable militaries(with the exception of China). Britain alone spends far more on defence than India, a nation which has for over 20 years now made quite impressive strides and has over a billion people.
In the end, cannons speak louder than foreign reserves. Especially as you can loot the other guy's.
But, jokes aside, the 2000-2010 period was relatively benign except for the last 1.5 years. That will not be repeated this decade and this needs to be taken into consideration before just extrapolating past trends into the future without taking the new realities on the ground into account.
"China real growth rate now is not 0"
Maybe it is. Looks like China just hit a wall.
http://www.cnbc.com/id/48604814
Sounds more like everyone else that buys from China hit a wall.
I appreciate your perspective but let's dig a little bit deeper.
There's no such thing as "growth." Never has been, never will be. It's a big lie meant to hide what's actually going on...transformation. In this case, transformation of stored fossil fuel energy into waste.
An attentive high school physics student could tell you that there's no such thing as growth. But for a variety of complex reasons we all believe the economists' big lie. Everyone, around the world.
It's mass madness is what it is.
Steve from Virginia is one of the best voices on this.
We built our economy, cities, and suburbs on a world of $1.50/gallon gasoline. Gas now costs $3.50 to $4.25 per gallon and will eventually move higher. But instead of adapting, we are denial about it. Much more efficient cars are available but people keep buying gas guzzlers. And then we wonder why we are barely making ends meet.
We need to face up to the fact that the world has changed and gasoline prices are permanently higher. We need more & better public transportation. If you have to use a car then people need to buy higher MPG vehicles. Most gas car purchases should be for hybrids. Ideally, people would start picking up PHEVs in larger numbers such as the Volt and the Ford C-Max Energi. For the hardcore, pure electrics are nice but I don't expect them to be popular with the masses any time soon.
If we don't do this, we are just going to be stuck in a permanent malaise. Anytime things look a little better, energy prices will just ratchet up and take away the growth.
Your post speculawyer is re: personal (& public) transport, however there's also the increasing cost of transporting goods and services via ships, trains and trucks and there's not much we can do about that type of inflation.
As far as changing personal transport, people have low efficiency vehicles that are often paid for and the trade off of purchasing a more efficient new vehicle only makes sense over many years, which may be difficult for people living paycheck to paycheck to justify. They may not even have the creditworthiness to purchase a prius or similar type efficient vehicle due to losing a home or investment property during the mortgage meltdown. Those that can still drive huge inefficient vehicles due so because they can still afford that type of luxury. Future increases in price at the pump and store will probably change that mindset. People also drive chunky transport to feel protected from injury to themselves and their kids.
The big picture of peak oil is lets be more efficient, but the small picture for each individual differs.
Yeah, the car you already own and is paid for is a much better economic proposition than buying a new fuel-efficient car. There would have to be an unrealistic massive gas price hike for a new car to be better than an existing car that gets crap MPG.
However, old cars do eventually need to be replaced. And when old car gives up the ghost and people do buy a new MPG car, the average MPG of new car purchases is distressingly low. It is around 23MPG. That is just too damn low. Yeah, I know, we buy a lot of trucks and that drags it down. But people shouldn't be buying so many trucks. Buy a car and just rent that truck at the local Home Depot or U-Haul when you really need to truck something.
Here is the reality. Most - many, at least - decisions are made based on fear. Anybody who has been 'pushed off' by a semi trailer passing them at 75 MPH is going to feel safer in a heavier vehicle. Even if they really aren't any safer. Physics shows that in a collision, the heavier of the two bodies transfers energy to the less massive one; but using that argument you'd have to be driving something like an aircraft carrier to gain the upper hand over a semi.
You will cream that Nano, though.
The thing is, big collisions are not the most common of life threatening events. They attract a lot of attention when they do happen, so they get a lot more consideration than the more common forms of terminal events - like rollovers, or being ejected from the vehicle in a low velocity crash.
People who can (or who think they can) afford to buy their way out from under a fear will do it every time. Especially if it's fear for the safety of their loved ones. Guilt is a powerful force too. Ask any car salesman.
Case in point!
http://autos.yahoo.com/news/conquest-vehicles-reveals-the-evade--its-new...
WHISKEY TANGO FOXTROT Humans have to be the dumbest species ever...
And yet, young Americans are not driving much. Are some not so dumb after all?
One take on why.
The move to SUVs to feel safer is caused by a fundamental miscalculation. It's obvious that, in a collision between two cars, the smaller one will come off second best. What's not so obvious, however, is the fact that the bigger the car, the more likely it is that you'll be involved in an accident.
A couple of years ago, I watched a film clip of a driving demonstration. Two men who were professional car testers (for newspapers or some such), and thus very good and experienced drivers, were tested on their ability to navigate a standard vehicle obstacle course. First they did it in a small car, then they did the same course in an SUV. They navigated the course successfully in the small car, but bombed in the SUV.
SUVs are much harder to control than a small car. They'll get you into strife a lot more often, even if they're safer than a small car in any individual collision.
Exactly. The lighter vehicle is only at a disadvantage in a head-on collision with a heavier vehicle, but only a very small fraction of accidents are head-on collisions.
In the vast majority of scenarios, a conventional car with a low center of gravity that's not too long performs best from a safety standpoint. It's the most controllable and won't roll over.
The Insurance Institute for Highway Safety has in the past documented lower death and injury rates for large sedans compared to small sedans. Here is a recent note about hybrids that are heavier than their ICE twins.
http://www.iihs.org/externaldata/srdata/docs/sr4610.pdf
Beware of selection effects. If careful drivers buy large sedans because they believe they are safer, then the self-selected population of careful drivers may lead to exactly those statistics, with no actual difference in the safety of the car itself.
This suggests an arms race.
On the other hand, if regulations force all cars to be smaller, overall mortality would go down.
The debate about large cars vs small reminds me of a debate in Israel over the safety of women during a period of street attacks. Someone suggested a curfew for women to keep them safe, and Golda Meir asked why not have a curfew for the men who were creating the problem?
Respectfully- The laws of physics do not change depending upon the angle of the crash. Small cars do worse in all types of crashes- even when rear ended. The impact of the forces affect the small car drivers and passengers far more. The angle may affect spin out, ricochet hits, etc. but not the impact delivered. Now when a big car hits a wall- yes the greater force it brings works against the big car driver more.
Also, small cars are more nimble than large cars, but not by that much that it usually makes a difference in the lighting fast scenerio that leads to most crashes. The idea of being a "small car ninga" is mostly born of fantasy and is completely useless in a rear end hit.
If you drive a large car slowly and carefully you are safer than being in a small car- period.
This not to say I favor large cars- they and ALL cars are destroying the planet- but using stats of bad drivers of large cars to say that both types of cars are equally safe is not correct. I only add this because I think readers need to make important safety decisions with correct info.
Number of miles driven, when driven, where driven, etc. also all affect safety greatly.
I would prefer a massive efficient rail and light rail system- but that's just me :)
Scroll down to the chart from the Insurance Institute. Unfortunately weight matters.
http://www.iihs.org/brochures/pdf/sfsc.pdf
Weight does matter, but not the weight you are thinking of. Bicycle commuters have a 28% LOWER (non-commuters 39% higher) mortality rate than those who do not. Our attention is too easily drawn to the bright-shiny and the red-bloody, and we are distracted from what is actually most likely to kill us.
This is why Green Transit in terms of public transit, bicycling and walking is the MOST important thing to save oil and greenhouse emissions quickly. In Carter's time it took
about 5 years for the first car fuel efficiency standards to really have an impact. (which ironically benefited Reagan). But now when people are holding onto cars longer and longer
it could take 7 years or longer for increased fuel efficiency to have an impact.
Whereas if we actually just RESTORED the Green Transit already running in 2008 before the
crash people could IMMEDIATELY being using Green Transit instead of driving.
This is why I oppose the electric car subsidy - that $7500 would be better spent restoring
the Transit benefit to $230 comparable to parking, just restoring existing Transit frequencies or increasing them on existing rails and routes which costs a pittance.
Copenhagen in a previously cited TOD article has the right idea - to move 75% of their
Transit to Green public transit, bicycling or walking!
That should be the goal for the US not these BAU plans like the North Jersey Transportation Planning Authority plan to increase Rail/public transit from 4% to 6%! Wow! that will save us!
(not!)
Actually the problem is that the people whom can afford to waste a lot of gas buy the gas guzzlers and the rest of the Americans are forced to buy them used. They don't have as much choice in the matter, inequality has its costs. The major reason why people I find don't like public transportation is that they have to confront the effect of inequality on society, it's harder to ignore when it is right in your face.
Since I notice the developing countries China and India burn a lot of coal I wonder if the key variable is average cost of energy, that is
x% stationary energy costs + (100-x%) transport energy costs
In other words they can afford to pay more for oil because their other energy costs are low. When that is no longer the case then the Asian economic miracle grinds to a halt. I've previously mentioned the disquiet about exporting Australian coal to China and India the same time domestic coal users have to pay stiff carbon taxes. When China and India no longer have cheap coal then their ability to pay more for oil will wane since their overall advantage is lost.
Robert, great article!!!
I can cut a lot of firewood and quickly with a chainsaw. Fuel is such a bargain.
A unit increase of energy in developing nations creates a big change- from walking to small cars or motor bikes, from doing agriculture by animal power to tractors, from handfans to electric fans. These seem small to us but big to them- so they will build stuff for us and take our dollars to buy outbid us for energy.
Something else, often overlooked, the rise of education in developing nations. Education leads to higher technology, leads to greater market value for products, leads to developing your own energy exploration companies. Education has leveled of in developed nations. In a sense, the global market of goods is really a trade of knowledge- which is something that can be increased among the people- to a point.
Finally, a shortage in raw materials and food products due to world overpopulation/consumption means a higher value for developing nations grain, metals, etc. This is traded for energy.
The effects of globalization, overconsumption and resource decline are leveling the world three different ways.
Thank you Robert for another interesting post. I think that we are looking at emergent systems behavior, or an example of the whole is greater than the parts. Average Wages in China are now approaching $3.88/hr. This can have profound aggregate effects. A hypothetical example would help to clarify: Take a worker who bicycles to work making $2/hr. Give them a raise to $3/hr. which to people in developed nations may seem like nothing, but to the worker would be 50% more income. Suddenly, a motor scooter is purchasable. The scooter may only use a gallon of fuel a week. Even at $4/gallon, this is probably easily affordable at this income level. On an individual level you move from no fuel purchase to a little fuel purchase. Doesn't seem like a big deal. But it is not just one person. We have to multiply this by many millions and suddenly to the rest of us it looks like demand is skyrocketing. A move to automobiles just make this same process worse. How high would the price have to go before the marginal cost of that one gallon of gasoline a week would be too expensive? As a percentage of discretionary income, I suspect the worker in China could go higher than we could. At a $3.88/hr. wage, would the Chinese worker be willing to work 4 hours a week for that gallon? That's $15.52/gallon! Would a U.S. worker be willing to spend $388/week filling their 25 gallon SUV? At a median hourly income of $22 in the U.S., that's 17.5 hours of work to fill up the tank each week. Apparently tiny increments matter when it is a mega trend.
Bingo. I think you explained it quite well.
One thing that's implicit in all this but that wasn't all that clear is the fraction of your income that you spend on oil products.
The large number of people in developing countries who drive, say, a small motorcycle (let alone people who run a kerosene lamp) don't spend a whole lot of their income on liquid fuels, so they aren't affected by higher prices as much as somebody who needs their (big?) vehicle for everything because they live in the 'burbs. I.e. they can tolerate higher oil prices before their economic activity is affected.
Robert, this is a great article. A clearer illustration of the idea of diminishing marginal returns would be hard to find.
I'd just be wary of extrapolating from the trend. There are a few factors in play. A lot of China's and India's oil demand has been for static applications (on-site electricity generation) because their electricity supply has been unreliable. This is changing - rapidly in China, slowly in India. So, some oil use is in effect being substituted with coal.
Secondly, demographics. China's working-age population is expected to peak in a couple of years. After that, its rate of GDP growth should slow down. New Chinese retirees are probably going to be focused on saving their money to provide for themselves into their 80s, and won't be keen on buying cars or even scooters.
India might take over as "the engine of growth", but India's growth rate has always been lower than China's and that trend does look set to continue, unless India somehow manages to sweep all the corrupt practices and most of the red tape and obstructionism out of its bureaucracy, and simultaneously ramps up its investment in education and transport infrastructure. Long odds on all of that happening.
Thirdly, high prices are yet to have their full long-run effect. We can expect much more substitution of oil with CNG and LPG, for example, particularly in countries where the existing fuel distribution networks aren't yet as big and politically powerful as they are in OECD countries.
So I don't expect the slope of the red line in figure 1 to be as steep in future.
I just don't understand why oil is considered sometimes to be so irreplaceable.
Sure, increasing import bills are a problem, but please note that OPEC countries are working very hard to spend their new income - that will tend to raise their non-oil imports, and raise oil-importer exports.
Yes, the cost of capex for substitutes will slow the economy down, but that's not overwhelming or permanent.
Yes, an oil shock can cause FUD, which slows down capex, but that's not permanent either. At a certain point EVs will gear up, and people will spend their money on them. In fact, car sales may go up, as there's actually a reason to buy a new car.
The US (and most of the OECD) has plenty of electricity, and plenty of time to transition from fossil fuel sources of electricity to renewable sources (not that we shouldn't transition away from FF much more quickly to reduce CO2 emissions...).
Our current operational problem is liquid fuels, and there are plenty of good substitutes for liquid fuels: electric vehicles (and their variants: hybrids, plug-in hybrids, extended range EVs, etc); freight reducing fuel consumption by 2/3 by moving from trucks to diesel trains, and then electric trains; heat pumps; and for the small percentage of energy that's needed for long-distance transportation, synthetic liquid fuels will work just fine.
At some point all the EVs etc will have been bought, and we'll not be worrying about oil any more.
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Consumption of marginal value is...of marginal value. The US doesn't really lose much if it cuts down on fuel consumption that doesn't benefit the user very much.
For example, if people use a Prius instead of a Chevy Tahoe (reducing fuel consumption by 75%), they may have lost a little bit of status, comfort, acceleration and crash safety, but...they get to work just fine.
Similarly, if they move from a Prius to a Volt (reducing fuel consumption by another 75%, to the point that ethanol could provide all of the non-electric miles), they may pay a bit more upfront, but over the Volt's lifetime they'll come out ahead. A little frontloading of expenses seems like a pretty small price to pay, especially when a Volt (like EVs in general) has much better road performance.
There are many more examples: shipping companies may lose a tiny bit of flexibility by moving from trucks to rail; water freight may have to retrofit skysails, reduce speed a little (a 20% speed reduction gives a 50% fuel consumption reduction), and eventually go to specialized batteries which might require more stops in port for battery switching; makers of packaging may have to find ways to maintain structural strength while reducing plastic content; chemical companies may have to add a process step or two to use non-oil sources of hydrocarbons; middle income shoppers may go online, and consolidate a few trips while they're waiting for their Prius to arrive; lower income drivers will have to go to lower-status higher-mileage older small cars (whose depreciation cost is so low that it offsets higher repair costs) while they wait for Priuses to arrive in used car lots; telecommuting would make managers uncomfortable.
None of these are a really big deal - their development diverts R&D away from other productive uses, and slow the economy down a bit during the transition, but it's not TEOTWAWKI.
In the long-term, oil consumption will be strongly non-linear. Above about $80, investment grows in alternatives, especially batteries. As both R&D and manufacturing volumes increase, innovation and economies of scale are creating disruptive competitors whose costs will reasonably soon start to fall well below the old oil-based price norms - at that point oil consumption will continue to fall even if oil prices start falling.
At that point, oil exporters will be in deep trouble, and wish they had saved as many of those T-bills as they could....
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Oil has been cheap and convenient for the last 100 years, but the industrial revolution started without it, and modern civilization certainly will continue without it.
• 130 years ago, kerosene was needed for illumination, and then electric lighting made it obsolete. The whole oil industry was in trouble for a little while, until someone (Benz) came up the infernal combustion engine-powered horseless carriage. EVs were still better than these noisy, dirty contraptions, which were difficult and dangerous to start. Sadly, someone came up with the first step towards electrifying the ICE vehicle, the electric starter, and that managed to temporarily kill the EV.
Now, of course, oil has become more expensive than it's worth, what with it's various kinds of pollution, and it's enormous security and supply problems.
• 40 years ago oil was 20% of US electrical generation, and now it's less than .8%.
• 40 years ago many homes in the US were heated with heating oil - the number has fallen by 75% since then.
• US vehicles reduced their fuel consumption per mile by 50% from about 1978 to about 1990.
• 50% of oil consumption is for personal transportation - this could be reduced by 60% by moving from the average US vehicle to something Prius-like. It could be reduced by 90% by going to something Volt-like. It could be reduced 100% by going to something Leaf-like. These are all cost effective, scalable, and here right now.
I personally prefer bikes and electric trains. But, hybrids, EREVs and EVs are cost effective, quickly scalable, and usable by almost everyone.
Sensible people won't move to a new home to reduce commuting fuel consumption. That would be far, far more expensive than replacing the car. It makes far more sense to buy an EV and amortize the premium over 10 years at a cost of about $1,000 per year (much less than their fuel savings), versus moving to a much higher cost environment (either higher rent or higher mortgage).
• As Alan Drake has shown, freight transportation can kick the oil-addiction habit relatively easily.
We don't need oil (or FF), and we should kick our addiction to it ASAP.
The only reason we haven't yet is the desperate resistance from the minority of workers and investors who would lose careers and investments if we made oil and other FFs obsolete.
Some might ask, what about our current debt problems?
Debt is a symbol, a marker - what matters is the underlying productive capability of our economy, which will be just fine. Could we screw up the management of our economy, and go into a depression? Sure. But it's not likely.
Don't these transitions take 50 years?
The transition from kerosen to electricity for illumination took roughly 30 years. The US transition away from oil-fired generation took very roughly 20 years. The transition away from home-heating oil was also faster than 50 years (though uneven).
The fast transition from steam to diesel locomotive engines is illustrative. There were a few diesel locomotives in use in the U.S. during World War II but steam dominated in 1945. However, the steam locomotives had been very heavily used during World War II, and they all wore out at approximately the same time the first few years after 1945. When steam locomotives wore out, they were invariably replaced by diesel in the mid 1940s. By 1949, almost all steam locomotives were gone. There were still some steam locos made in the late 40's, and they were still in service in the 50's but dwindling. The RR's also relegated the steamers to branch line and switcher use - replacing the most used lines with diesel first as you would expect. Cn rail retired its last steam engine in 1959.
Other, very slow transitions are not a good guide to the future. For instance, the transition from coal to oil could be very slow, because there was no pressure - it was a trade up, not a replacement of a scarce resource. Many transitions occurred because something new & better came along - but the older system was still available and worked just fine. Oil may become very expensive very fast and that would provide us an incentive to switch over much more quickly.
On the other hand, we can point to many energy transitions that were sideways or down. The early transition from wood to coal in the UK was a big step down: harder to find and transport, dirtier - a pain in every way. Coal's only virtue was it's abundance. The transition from EVs to ICEs took a while - only when ICEs started to electrify did they become competitive. And, of course, we hid the external costs of oil from consumers: freeways (built by "engine" Charley Wilson after he went from President of GM to Secretary of Defense), pollution, overseas wars, etc. I'd argue that ICEs were never better than EVs - they just appeared that way.
On the other hand, EVs are better right now. They have better driving performance (better acceleration, better handling), and lower total lifecycle costs.
Unfortunately, we have more than 50 years worth of things we can burn for electricity. Fortunately, it doesn't look like we will. For instance, coal consumption in the US dropped 9% last year, about half of that due to loss of market share.