The Energy Transition in Emerging Markets, Part I

That economic activity is transformed energy is a truism. Technological innovations, allowing the harnessing of wind, water, coal, oil, nuclear, and solar power, were the driving force behind the Industrial Revolution since the 18th century. Yet, because of environmental concerns, energy consumption growth has slowed, and political pressures are increasing to radically reduce the consumption of hydrocarbons, which are still by far the primary source of fuel.

The two charts below show the dramatic slowdown in global energy consumption growth, based on data from the Energy Institute Statistical Review of World Energy? (link) . This decline has been partially voluntary to the extent that conservation policies and higher energy taxes since the 1970s have incentivized lower consumption. In effect, many “rich” countries have chosen to explicitly recognize the economic externalities related to hydrocarbon consumption (pollution, climate change), even if with some hypocrisy to the extent that polluting industries have simply moved offshore (e.g., petrochemicals to China and the Middle-East). Also, lower consumption growth resulted from the Great Financial Crisis (2007-08) and the decade-long period of sub-par growth that it engendered. Consumption growth in the OECD has been negative since the 2000 recession. This is the first time in 200 years that this has happened for such a long period of time and certainly has contributed to declines in productivity and GDP growth.

As primary energy consumption growth has stalled in rich countries, developing countries have taken up some of the slack, as shown in the following chart from the FT.

In addition to China and India, rapidly growing developing countries in South Asia and Africa representing about 30% of the world population also continue to grow energy consumption quickly. These countries all have per capita consumption levels well below the level of the OECD countries and the US, and their future growth and welfare are tied to increased energy consumption to raise living standards and acquire the basic comforts of modern life.

The Non-OECD countries consume about a third as much energy per capita as the OECD countries and 17% of the energy consumed by Americans, as shown in the following chart. Indians consume 15% and 9% of the per capita energy consumed in the OECD and the US, respectively. Africans consume less than 3% and 2% of the per capita consumption in the OECD and the US.

The negative impact on the growth of world energy consumption caused by stagnation in the OECD is losing strength for the simple reason that the OECD’s share of total consumption is rapidly declining, as we can see in the next chart. When consumption growth stalled in OECD countries some twenty years ago, the OECD had 60% of world consumption, but that has now fallen to 39%.

If we assume that the growth trends of the past decade persist for the next ten years, then world primary energy consumption annual growth would increase from 1.1% to 1.9%, and the Non-OECD share of total consumption will rise from 61% to 65%. As shown in the chart below, under this scenario, total primary energy consumption would rise a further 20% over the next ten years.

In a world facing increasing risks from global warming, ideally, this increased consumption will be met by “clean” energies, but so far only Europe seems committed to this goal. Both China and India remain wedded to coal, nuclear remains generally taboo, and most countries face political opposition to the high cost of transitioning to solar and wind.”

In the following blog, we will explore the role of hydrocarbons in the ongoing transition to clean energy.