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The OECD Energy Conundrum

Posted on February 27, 2012 | Leave a comment

As far back as 2003, the OECD noticed that the economies of its members were moving apart, not converging. At the time, all the talk was about productivity due to adoption of information and communications technologies–some (notably the U.S.) were doing it better than others, and were making hay while the sun shone.

Fast forward a decade and the storyline is similar in some ways–the OECD countries are not converging–but the reasons why seem to be shifting. Everybody has jumped on the IT revolution, clasping it to their collective bosom. But not only are countries not getting more similar, they seem to be getting more different.

Actually, the explanation is pretty simple. Some countries that joined the OECD in more recent decades are not at all similar to the original membership. But the differences have consequences. Talking about the OECD as a monolithic bloc really doesn’t make sense any more.

And nowhere is this truer than when people talk about energy. And once again, the desire to analyze at a macro rather than a micro level is leading prognosticators and analysts perilously close to the same error they have made (and I hope to have highlighted here) about the developing (read: non-OECD) world. Just as we saw that China, India, Indonesia and others are set to grow much faster than agencies such as the Department of Energy and the International Energy Agency have predicted, so too will OECD members such as Mexico and Turkey. The slow (0.3% annual) growth that these agencies forecast for the OECD as a whole look woefully inadequate when looking at the younger, still developing developed countries.

PriceWaterhouse Coopers, in their paper ‘The World in 2050,’ predicted that Mexico would grow at the same rate (3.9% annually) as China through 2050. They predict that economic growth in Turkey would actually be faster, at 4.2% annually. That’s why the two countries were included in their new classification, the Emerging Seven, joining the usual suspects–China, India, Indonesia, Brazil and (oops!) Russia.

I personally believe both Turkey and Mexico should be included in the OECD. But I also believe that they both need and want to develop as much as China does. And if they do, their energy growth will not be the paltry 0.3% growth predicted for them. If their economies grow as quickly as China, so too will their energy consumption.

Forty years of growth at a very rapid pace leads to some staggering totals at the end of the period. the PWC paper says the Emerging 7 will have economies larger than the G7 by 2050. Pretty safe to say that their energy use will be larger as well.

Mexico

Mexico is expected to see its population rise from 112 million in 2010 to 135 million in 2030, and 153 million by 2050. Their GDP is expected to grow from $1 trillion in 2010 and, according to Goldman Sachs, this will reach $9 trillion by 2050.

In 2006, Mexico consumed 7.4 quads per year.

They will be richer than we Americans are today. They will have access to the fuel they both need and want.

If they then decide to use energy at the rate we are today (323 mbtus per person), the 153 million Mexicans will consume 49.4 quads per year. That’s a compound annual growth rate of 4.1% per year.

Turkey

Turkey’s population is forecast to rise from 73.7 million in 2010 to 93.7 million in 2030, and 86.4 million by 2050. Their GDP is expected to grow from $735 billion in 2010 to $5.3 trillion in 2050. Again, they will be rich enough to consume energy as profligately as Americans, should they so choose.

Turkey’s energy consumption was 4 quads in 2006. If they do choose to consume energy as Americans do today, they will burn 30 quads in 2050. That’s a 4.6% CAGR.

It’s all very well to note that Eastern Europe (and much of Western Europe as well) is going to experience population declines that may lower energy consumption, or at least growth in energy consumption. But the OECD now has dynamic and growing countries ranging from Chile and Australia to Turkey and Mexico.

To ascribe to the group as a whole a slow percentage growth is missing the picture.

Next steps for me are to extend the forecasting through to at least 2075 for the developing world and to start on the developed world thereafter. I’ve spent some time over the past month trying to understand the drivers of energy consumption in the developed world to try and get an intuitive feel of which way the cat is going to jump.

The ‘developed world’ as I use the phrase is limited to members of the OECD. This is merely a convention I use because international energy statistics are conveniently broken out between OECD and non-OECD nations and used as a proxy for ‘developed’ and ‘developing’ nations. But it’s relatively easy to identify subgroups within each category that don’t look like the rest of the members.

For example, within the 34 OECD nations we see that 4 countries–Chile, Mexico, Turkey and the U.S.–are slated to grow in different ways than the other members, in part simply because their population is projected to grow significantly over the first half of this century, while other OECD members will see either stable or declining population levels. This means that for some measures it will be a bit confusing to treat the OECD as a homogenous unit.

For example, while the 30 other members of the OECD are wealthy, stable and could perhaps best be described as the ‘reclining world’, the 4 countries I just mentioned actually account for 42% of the overall GDP for the OECD, mostly due to the inclusion of the U.S. as a developed-but-still-growing-country (Quick–someone think of a good acronym!). The same is true for population. The U.S., Turkey, Mexico and Chile account for 40% of the OECD’s population. To make it trickier, as new countries are added into the OECD club, there’s a good chance that they will look more like the 4 outliers than the recliners that have the most seats at the table.

In my paper, I differentiated between the non-OECD nations by noting that some (mostly in Asia and Africa and Latin America) were growing quickly, and I calculated a 5% annual growth rate for their energy consumption through 2030 (and speculated that that rate would hold through 2075). I suspect the same segmentation will be appropriate for the developed world as well, and I may end up abandoning the convenience of OECD vs. non-OECD nations and creating my own groups. (It would be nice if I could use just two groups, but I’m not an optimist about that.) And I’m pretty certain that I will find myself at odds with the Department of Energy’s Energy Information Administration again. I may be writing a similar paper saying that while the majority of OECD countries may follow their very-low-growth projections of 0.3% per year energy consumption, the countries that matter most will be growing more quickly.

But they play the game on the field and I’ll actually have to do the work before making the case. Feel free to chime in and help me construct the right framework for doing this. It’s going to take at least a month, so we all have time to think about it.

The OECD Energy Conundrum

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