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BP Data Suggests We Are Reaching Peak Energy Demand

Gail Tverberg's picture
Researcher OurFiniteWorld.com

My background is as an actuary, making financial forecasts for the insurance industry. In 2015, I began investigating how the limits of a finite world might affect the financial system, oil...

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Some people talk about peak energy (or oil) supply. They expect high prices and more demand than supply. Other people talk about energy demand hitting a peak many years from now, perhaps when most of us have electric cars.

Neither of these views is correct. The real situation is that we right now seem to be reaching peak energy demand through low commodity prices. I see evidence of this in the historical energy data recently updated by BP (BP Statistical Review of World Energy 2015). Of course,

Growth in world energy consumption is clearly slowing. In fact, growth in energy consumption was only 0.9% in 2014. This is far below the 2.3% growth we would expect, based on recent past patterns. In fact, energy consumption in 2012 and 2013 also grew at lower than the expected 2.3% growth rate (2012 – 1.4%; 2013 – 1.8%).

Figure 1- Resource consumption by part of the world. Canada etc. grouping also includes Norway, Australia, and South Africa. Based on BP Statistical Review of World Energy 2015 data.

Figure 1- Resource consumption by part of the world. Canada etc. grouping also includes Norway, Australia, and South Africa. F Soviet Union means Former Soviet Union. Middle East excludes Israel. Based on BP Statistical Review of World Energy 2015 data.

Recently, I wrote that economic growth eventually runs into limits. The symptoms we should expect are similar to the patterns we have been seeing recently (Why We Have an Oversupply of Almost Everything (Oil, labor, capital, etc.)). It seems to me that the patterns in BP’s new data are also of the kind that we would expect to be seeing, if we are hitting limits that are causing low commodity prices.

One of our underlying problems is that energy costs that have risen faster than most worker’s wages since 2000. Another underlying problem has to do with globalization. Globalization provides a temporary benefit. In the last 20 years, we greatly ramped up globalization, but we are now losing the temporary benefit globalization brings. We find we again need to deal with the limits of a finite world and the constraints such a world places on growth.

Energy Consumption is Slowing in Many Parts of the World 

Many parts of the world are seeing slowing growth in energy consumption. One major example is China.

Figure 2. China's energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

Figure 2. China’s energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

Based on recent patterns in China, we would expect fuel consumption to be increasing by about 7.5% per year. Instead, energy consumption has slowed, with growth amounting to 4.3% in 2012; 3.7% in 2013; and 2.6% in 2014. If China was recently the growth engine of the world, it is now sputtering.

Part of China’s problem is that some of the would-be buyers of its products are not growing. Europe is a well-known example of an area with economic problems. Its consumption of energy products has been slumping since 2006.

Figure 3. European Union Energy Consumption based on BP Statistical Review of World Energy 2015 Data.

Figure 3. European Union Energy Consumption based on BP Statistical Review of World Energy 2015 Data.

I have used the same scale (maximum = 3.5 billion metric tons of oil equivalent) on Figure 3 as I used on Figure 2 so that readers can easily compare the European’s Union’s energy consumption to that of China. When China was added to the World Trade Organization in December 2011, it used only about 60% as much energy as the European Union. In 2014, it used close to twice as much energy (1.85 times as much) as the European Union.

Another area with slumping energy demand is Japan. It consumption has been slumping since 2005. It was already well into a slump before its nuclear problems added to its other problems.

Figure 4. Japan energy consumption by fuel, based on BP Statistical Review of World Energy 2015.

Figure 4. Japan energy consumption by fuel, based on BP Statistical Review of World Energy 2015.

A third area with slumping demand is the Former Soviet Union (FSU). The two major countries within tithe FSU with slumping demand are Russia and Ukraine.

Figure 5. Former Soviet Union energy consumption by source, based on BP Statistical Review of World Energy Data 2015.

Figure 5. Former Soviet Union energy consumption by source, based on BP Statistical Review of World Energy Data 2015.

Of course, some of the recent slumping demand of Ukraine and Russia are intended–this is what US sanctions are about. Also, low oil prices hurt the buying power of Russia. This also contributes to its declining demand, and thus its consumption.

The United States is often portrayed as the bright ray of sunshine in a world with problems. Its energy consumption is not growing very briskly either.

Figure 6. United States energy consumption by fuel, based on BP Statistical Review of World Energy 2014.

Figure 6. United States energy consumption by fuel, based on BP Statistical Review of World Energy 2014.

To a significant extent, the US’s slowing energy consumption is intended–more fuel-efficient cars, more fuel efficient lighting, and better insulation. But part of this reduction in the growth in energy consumption comes from outsourcing a portion of manufacturing to countries around the world, including China. Regardless of cause, and whether the result was intentional or not, the United States’ consumption is not growing very briskly. Figure 6 shows a small uptick in the US’s energy consumption since 2012. This doesn’t do much to offset slowing growth or outright declines in many other countries around the world.

Slowing Growth in Demand for Almost All Fuels

We can also look at world energy consumption by type of energy product. Here we find that growth in consumption slowed in 2014 for nearly all types of energy.

Figure 7. World energy consumption by part of the world, based on BP Statistical Review of World Energy 2015.

Figure 7. World energy consumption by part of the world, based on BP Statistical Review of World Energy 2015.

Looking at oil separately (Figure 8), the data indicates that for the world in total, oil consumption grew by 0.8% in 2014. This is lower than in the previous three years (1.1%, 1.2%, and 1.1% growth rates).

Figure 8. Oil consumption by part of the world, based on BP Statistical Review of World Energy 2015.

Figure 8. Oil consumption by part of the world, based on BP Statistical Review of World Energy 2015.

If oil producers had planned for 2014 oil consumption based on the recent past growth in oil consumption growth, they would have overshot by about 1,484 million tons of oil equivalent (MTOE), or about 324,000 barrels per day. If this entire drop in oil consumption came in the second half of 2014, the overshoot would have been about 648,000 barrels per day during that period. Thus, the mismatch we are have recently been seeing between oil consumption and supply appears to be partly related to falling demand, based on BP’s data.

(Note: The “oil” being discussed is inclusive of biofuels and natural gas liquids. I am using MTOE because MTOE puts all fuels on an energy equivalent basis. A barrel is a volume measure. Growth in barrels will be slightly different from that in MTOE because of the changing mix of liquid fuels.)

We can also look at oil consumption for the EU, EU, and Japan, compared to all of the rest of the world.

Figure 9. Oil consumption divided between the (a) US, EU, and Japan, and (b) Rest of the World.

Figure 9. Oil consumption divided between the (a) US, EU, and Japan, and (b) Rest of the World.

While the rest of the world is still increasing its growth in oil consumption, its rate of increase is falling–from 2.3% in 2012, to 1.6% in 2013, to 1.3% in 2014.

Figure 10 showing world coal consumption is truly amazing. Huge growth in coal use took place as globalization spread. Carbon taxes in some countries (but not others) further tended to push manufacturing to coal-intensive manufacturing locations, such as China and India.

Figure 10. World coal consumption by part of the world, based on BP Statistical Review of World Energy 2015.

Figure 10. World coal consumption by part of the world, based on BP Statistical Review of World Energy 2015.

Looking at the two parts of the world separately (Figure 11), we see that in the last three years, growth in coal consumption outside of US, EU, and Japan, has tapered down. This is similar to the result for world consumption of coal in total (Figure 10).

Figure 10. Coal consumption for the US, EU, and Japan separately from the Rest of the World, based on BP Statistical Review of World Energy data.

Figure 11. Coal consumption for the US, EU, and Japan separately from the Rest of the World, based on BP Statistical Review of World Energy data.

Another way of looking at fuels is in a chart that compares consumption of the various fuels side by side (Figure 12).

Figure 8. World energy consumption by fuel, showing each fuel separately, based on BP Statistical Review of World Energy 2015.

Figure 12. World energy consumption by fuel, showing each fuel separately, based on BP Statistical Review of World Energy 2015.

Consumption of oil, coal and natural gas are all moving on tracks that are in some sense parallel. In fact, coal and natural gas consumption have recently tapered more than oil consumption. World oil consumption grew by 0.8% in 2014; coal and natural gas consumption each grew by 0.4% in 2014.

The other three fuels are smaller. Hydroelectric had relatively slow growth in 2014. Its growth was only 2.0%, compared to a recent average of as much as 3.5%. Even with this slow growth, it raised hydroelectric energy consumption to 6.8% of world energy supply.

Nuclear electricity grew by 1.8%. This is actually a fairly large percentage gain compared to the recent shrinkage that has been taking place.

Other renewables continued to grow, but not as rapidly as in the past. The growth rate of this grouping was 12.0%, (compared to 22.4% in 2011, 18.1% in 2012, 16.5% in 2013). With the falling percentage growth rate, growth is more or less “linear”–similar amounts were added each year, rather than similar percentages. With recent growth, other renewables amounted to 2.5% of total world energy consumption in 2014.

Falling Consumption Is What We Would Expect with Lower Inflation-Adjusted Prices

People buy goods that they want or need, with one caveat: they don’t buy what they cannot afford. To a significant extent affordability is based on wages (or income levels for governments or businesses). It can also reflect the availability of credit.

We know that commodity prices of many kinds (energy, food, metals of many kinds) have been have generally been falling, on an inflation adjusted basis, for the past four years. Figure 13 shows a graph prepared by the International Monetary Fund of trends in commodity prices.

Figure 9. Charts prepared by the IMF showing trends in indices of primary commodity prices.

Figure 13. Charts prepared by the IMF showing trends in indices of primary commodity prices.

It stands to reason that if prices of commodities are low, while the general trend in the cost of producing these commodities is upward, there will be erosion in the amount of these products that can be purchased. (This occurs because prices are falling relative to the cost of producing the goods.) If, prior to the drop in prices, consumption of the commodity had been growing rapidly, lower prices are likely to lead to a slower rate of consumption growth. If prices drop further or stay depressed, an absolute drop in consumption may occur.

It seems to me that the lower commodity prices we have been seeing over the past four years (with a recent sharper drop for oil), likely reflect an affordability problem. This affordability problem arises because for most people, wages did not rise when energy prices rose, and the prices of commodities in general rose in the early 2000s.

For a while, the lack of affordability could be masked with a variety of programs: economic stimulus, increasing debt and Quantitative Easing. Eventually these programs reach their limits, and prices begin falling in inflation-adjusted terms. Now we are at a point where prices of oil, coal, natural gas, and uranium are all low in inflation-adjusted terms, discouraging further investment.

Commodity Exporters–Will They Be Next to Be Hit with Lower Consumption?

If the price of a commodity, say oil, is low, this is a problem for a country that exports the commodity. The big issue is likely to be tax revenue. Governments very often get a major share of their tax revenue from taxing the profits of the companies that sell the commodities, such as oil. If the price of oil, or other commodity that is exported drops, then it will be difficult for the government to collect enough tax revenue. There may be other effects as well. The company producing the commodity may cut back its production. If this happens, the exporting country is faced with another problem–laid-off workers without jobs. This adds a second need for revenue: to pay benefits to laid-off workers.

Many oil exporters currently subsidize energy and food products for their citizens. If tax revenue is low, the amount of these subsidies is likely to be reduced. With lower subsidies, citizens will buy less, reducing world demand. This reduction in demand will tend to reduce world oil (or other commodity) prices.

Even if subsidies are not involved, lower tax revenue will very often affect the projects an oil exporter can undertake. These projects might include building roads, schools, or hospitals. With fewer projects, world demand for oil and other commodities tends to drop.

The concern I have now is that with low oil prices, and low prices of other commodities, a number of countries will have to cut back their programs, in order to balance government budgets. If this happens, the effect on the world economy could be quite large. To get an idea how large it might be, let’s look again at Figure 1, recopied below.

Notice that the three “layers” in the middle are all countries whose economies are fairly closely tied to commodity exports. Arguably I could have included more countries in this category–for example, other OPEC countries could be included in this grouping. These countries are now in the “Rest of the World” category. Adding more countries to this category would make the portion of world consumption tied to countries depending on commodity exports even greater.

Figure 1- Resource consumption by part of the world. Canada etc. grouping also includes Norway, Australia, and South Africa. Based on BP Statistical Review of World Energy 2015 data.

Figure 1- Resource consumption by part of the world. Canada etc. groupng also includes Norway, Australia, and South Africa. F Soviet Union means Former Soviet Union. Middle East excludes Israel. Based on BP Statistical Review of World Energy 2015 data.

My concern is that low commodity prices will prove to be self-perpetuating, because low commodity prices will adversely affect commodity exporters. As these countries try to fix their own problems, their own demand for commodities will drop, and this will affect world commodity prices. The total amount of commodities used by exporters is quite large. It is even larger when oil is considered by itself (see Figure 8 above).

In my view, the collapse of the Soviet Union in 1991 occurred indirectly as a result of low oil prices in the late 1980s. A person can see from Figure 1 how much the energy consumption of the Former Soviet Union fell after 1991. Of course, in such a situation exports may fall more than consumption, leading to a rise in oil prices. Ultimately, the issue becomes whether a world economy can adapt to falling oil supply, caused by the collapse of some oil exporters.

Our Economy Has No Reverse Gear

None of the issues I raise would be a problem, if our economy had a reverse gear–in other words, if it could shrink as well as grow. There are a number of things that go wrong if an economy tries to shrink:

  • Businesses find themselves with more factories than they need. They need to lay off workers and sell buildings. Profits are likely to fall. Loan covenants may be breached. There is little incentive to invest in new factories or stores.
  • There are fewer jobs available, in comparison to the number of available workers. Many drop out of the labor force or become unemployed. Wages of non-elite workers tend to stagnate, reflecting the oversupply situation.
  • The government finds it necessary to pay more benefits to the unemployed. At the same time, the government’s ability to collect taxes falls, because of the poor condition of businesses and workers.
  • Businesses in poor financial condition and workers who have been laid off tend to default on loans. This tends to put banks into poor financial condition.
  • The number of elderly and disabled tends to grow, even as the working population stagnates or falls, making the funding of pensions increasingly difficult.
  • Resale prices of homes tend to drop because there are not enough buyers.

Many have focused on a single problem area–for example, fractional reserve banking–as being the problem preventing the economy from shrinking. It seems to me that this is not really the issue. The problem is much more fundamental. We live in a networked economy; a networked economy has only two directions available to it: (1) growth and (2) recession, which can lead to collapse.

Conclusion

What we seem to be seeing is an end to the boost that globalization gave to the world economy. Thus, world economic growth is slowing, and because of this slowed economic growth, demand for energy products is slowing. This globalization was encouraged by the Kyoto Protocol (1997). The protocol aimed to reduce carbon emissions, but because it inadvertently encouraged globalization, it tended to have the opposite effect. Adding China to the World Trade Organization in 2001 further encouraged globalization. CO2 emissions tended to grow more rapidly after those dates.

Figure 14. World CO2 emissions from fossil fuels, based on data from BP Statistical Review of World Energy 2015.

Figure 14. World CO2 emissions from fossil fuels, based on data from BP Statistical Review of World Energy 2015.

Now growth in fuel use is slowing around the world. Virtually all types of fuel are affected, as are many parts of the world. The slowing growth is associated with low fuel prices, and thus slowing demand for fuel. This is what we would expect, if the world is running into affordability problems, ultimately related to fuel prices rising faster than wages.

Globalization brings huge advantages, in the form of access to cheap energy products still in the ground. From the point of view of businesses, there is also the possibility of access to cheap labor and access to new markets for selling their goods. For long-industrialized countries, globalization also represents a workaround to inadequate local energy supplies.

The one problem with globalization is that it is not a permanent solution. This happens for several reasons:

  • A great deal of debt is needed for the new operations. At some point, this debt starts reaching limits.
  • Diminishing returns leads to higher cost of energy products. For example, later coal may need to come from more distant locations, adding to costs.
  • Wages in the newly globalized area tend to rise, negating some of the initial benefit of low wages.
  • Wages of workers in the area developed prior to globalization tend to fall because of competition with workers from parts of the world getting lower pay.
  • Pollution becomes an increasing problem in the newly globalized part of the world. China is especially concerned about this problem.
  • Eventually, more than enough factory space is built, and more than enough housing is built.
  • Demand for energy products (in terms of what workers around the world can afford) cannot keep up with production, in part because wages of many workers lag thanks to competition with low-paid workers in less-advanced countries.

It seems to me that we are reaching the limits of globalization now. This is why prices of commodities have fallen. With falling prices comes lower total consumption. Many economies are gradually moving into recession–this is what the low prices and falling rates of energy growth really mean.

It is quite possible that at some point in the not too distant future, demand (and prices) will fall further. We then will be dealing with severe worldwide recession.

In my view, low prices and low demand for commodities are what we should expect, as we reach limits of a finite world. There is widespread belief that as we reach limits, prices will rise, and energy products will become scarce. I don’t think that this combination can happen for very long in a networked economy. High energy prices tend to lead to recession, bringing down prices. Low wages and slow growth in debt also tend to bring down prices. A networked economy can work in ways that does not match our intuition; this is why many researchers fail to see understand the nature of the problem we are facing.

Gail Tverberg's picture
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donough shanahan's picture
donough shanahan on Jun 24, 2015

The only issue I have with this claim is that India, Africa and South America could each have an impact similar (but likely less) to China in terms of increasing energy consumption. Cleary China is dominatingthe rest of the world data simply becuase the other areas have not caught up yet.

As many of these areas have low energy consumption, the question is are the declines currently being seen likely to be offset or over powered by these increases? Considering that many of these countries are behind the curve re access to energy, could there be a lull before continued rises?

Gail Tverberg's picture
Gail Tverberg on Jun 25, 2015

Renewable energies are attractive, because we would like a free lunch–effectively a perpetual motion machine that gives us all the energy we want, with virtually no inputs.

Unfortunately, in the real world, such free lunches don’t exist. Using fossil fuels, we can add on devices of various kinds to our existing fossil fuel infrastructure, and call them “renewable.” In fact, they may operate as long as the system itself operates, if they get an adequate supply of of spare parts and other types of maintenance, again using the fossil fuel system.

What the economy really needs is “cheap to operate” devices which extend our fossil fuel system. The use of these “cheap to operate” devices needs to help generate tax revenue for the system–something they are not doing now. Instead, they too often need subsidies–something that by themselves prove that they are a drain on the system. High priced alternative vehicles are another drain on the system, because they effectively require the poor to subsidize the rich through subsidies.

If our current system were not on the edge of “breaking,” perhaps these issues would not be important. Unfortunately, we are dealing with a financial system on the edge fo collapse (young people who cannot afford to get married and buy homes; endless stimulous policies including zero interest rate policies  blowing stock market bubbles; many businesses whose best investment is buying back their own stock). “Renewables” tend to make our current collapse-prone situation worse rather than better.

If renewables can “pay their own way,” I am all for them. Otherwise, they are just an excuse to use more coal and other fossil fuels to make devices that look like they are helpful for the long term.

Gail Tverberg's picture
Gail Tverberg on Jun 25, 2015

I started to write about the issue of where else we could go, after China, for growth, but decided the post was getting too long anyhow. 

China had several advantages over other places:

(1) A large supply of coal resources that it could easily ramp up.

(2) Willingness and ability to borrow huge amounts of money, to support its effort.

(3) A history of organized approaches to problems that allowed it to greatly upgrade its infrastructure to permit coal to get to market, new factories to be built, and workers to be moved to the places where they were needed in new factories.

The other areas you are talking about don’t have these advantages. In fact, they are already reaching limits of various kinds. I don’t know if you saw the WSJ article a few days ago called, Ghana’s Growth Spurs Uncontrollable Trash. I have been to India, and their major cities have major pollution problems. I was having real difficulty breathing the air in Mumbai. The major cities are alreay huge. We are kidding ourselves thinking that they can grow further, without reaching the same pollution problems that China is reaching.

donough shanahan's picture
donough shanahan on Jun 25, 2015

Thanks Gail

It appears that the pollution problems have already reached India and others. And yet energy consumption is still very low in many of those countries. But ultimately you may be right in that access to resources will provide the hard limit.

Robert Bernal's picture
Robert Bernal on Jun 26, 2015

It is sad that the world energy demands are slowing. There are too many people in poverty for that to be a good thing. What the world needs is energy to desalinate enough water to green a desert – essentially creating a brand new country’s worth of economic activity! And, of course, clean energy for a growing, and very prosperous world. Eventually, up to 15 billion people will want everything the rich already has (and who knows what else)!

Granted, passive solar designs shall reduce requirements for space heating/cooling, leds for lighting and electric motors for cars, but we can not deny eventual increased global energy demands, like energy intensive recreation (like travel) and the need for water desalination, fertilizer, all the basic infrastructures – and their continual upkeep. Also, energy for the sequester of excess CO2!

Mere fossil fuels can not suffice for two reasons: they are finite and they are already damaging at the planetary scale. Solar, wind and their batteries could be made from molten salt nuclear reactors, since the high EROEI of the advanced nuclear could “energy afford” the lower (combined) EROEI of the renewable energy systems which do not require fossil fueled backup. Those renewables that do require FF backup already have high enough EROEI to justify their purpose – as long as something other than FFs are eventually used for their tremendous need for backup.

It is in “all these things” that the economy needs to feed itself – until we master the machine automated steady state economy powered by fusion – mere decades from now.

Roger Arnold's picture
Roger Arnold on Jun 28, 2015

Gail,

You won’t get any argument from me about our financial system being on the edge of collapse. We may differ as to the reasons. I believe you see it as caused by limits to growth. I see it as something else. I don’t have a succinct phrase that captures it, but it has to do with inherent instabilities of the economic system and technological developments that have created conditions ripe for those instabilities to manifest. 

That probably makes it sound more complex than it really is. Basically, the economic system under which we operate has become disfunctional. From a game-theoretic point of view, its incentive structures are perverse. Companies have an incentive to reduce labor costs for the goods and services they produce; they “win” when they are able to do so more effectively than their competitors. That’s usually healthy. But when the goods and services a company produces are for a consumer market that strongly overlaps the labor market, the cost reductions that are good for the company are bad for the economy as a whole. The money saved by reducing the company’s costs is money lost to the rest of the economy. The company prospers by carving away at the foundations on which its prosperity stands.

Whether higher productivity is healthy depends on the state of the labor market. If the labor market is strong, then the labor “liberated” by higher productivity will be absorbed elsewhere, and the economy will grow. If it’s weak, the displaced labor enters an already depressed market and contributes to a downward spiral.

The state of the labor market is determined by a balance of factors. One is the set of unmet needs — goods and services for which there would be a market if they could be produced at an appropriate cost. Another is the set of labor skills needed to address those unmet needs. A third is the willingness of investors to fund new jobs.

What we have right now is a really bad alignment of those factors. Technological unemployment has been displacing labor faster than labor can be retrained for new jobs, while driving down wages for jobs that displaced labor could move to. Hence, in part, the withering of the middle class.

More fundamentally, the unmet needs that exist and could serve as the drivers for new jobs primarily involve enhancements to energy and transportation infrastructure. They would benefit society as a whole, but are hard to market and hard to fund. In a capitalist society, “the common good” has no authority to sign checks.

 

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