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What Economists Missed: Why World Coal Consumption Keeps Rising

A primary reason why coal consumption is rising is because of increased international trade, starting when the World Trade Organization was formed in 1995, and greatly ramping up when China was added in December 2001. Figure 1 shows world fossil fuel extraction for the three fossil fuels. A person can see a sharp “bend” in the coal line, immediately after China was added to the World Trade Organization. China’s data also shows a sharp increase in coal use at that time.

Figure 1. World fossil fuel supply based on world production data from BP's 2012 Statistical Review of World Energy.

Figure 1. World fossil fuel supply based on world production data from BP’s 2012 Statistical Review of World Energy.

China and many other Asian countries had not previously industrialized. The advent of international trade gave them opportunities to make and sell goods below the cost of other countries. In order to do this, they needed fuel, however. The fuel the West had used when it industrialized was coal. Coal had many advantages for a newly industrialized countries: it often can be extracted without advanced technology; it is relatively cheap to extract; and it is often available locally. It can be used to make many of the basic items used by industrialized countries, including steel, concrete, and electricity.

The industrialization of Asian countries was pushed along by many forces. Companies in the West were eager to have a way to make goods cheaper. Buyers were happy with lower prices. Even the Kyoto Protocol tended to push international trade along. This document made it clear that countries signing the document wouldn’t be in the market for coal. From the point of the developing countries, this would help hold coal prices down (at least in the export market). It also likely meant a better long-term supply of coal for developing countries. The Kyoto Protocol offered no penalties for exporting products made with coal, so it put countries that used coal to make products for export in a better competitive position. This was especially the case if Kyoto Protocol countries used carbon taxes to make their own products higher priced.

Apart from the international trade /industrialization issue, there is another issue that is helping to keep coal consumption rising. It is the fact that oil supply is in short supply and high priced, and this means that economies of countries that disproportionately use a lot of oil in their economies are at a competitive disadvantage. Countries coming “late to the party” are in a good position to develop their economies using little oil and much coal, and thus keep overall energy costs down. This approach gives the developing countries a competitive advantage over the developed countries.

Let’s look at a few graphs. In terms of  oil leverage (total energy consumed /oil energy consumed), China and India come out way ahead of several other selected country groups.  They do this with their heavy use of coal.

Figure 2. Ratio of total energy consumed to oil (including biofuels) consumed, based on BP's 2012 Statistical Review of World Energy.

Figure 2. Ratio of total energy consumed to oil (including biofuels) consumed, based on BP’s 2012 Statistical Review of World Energy.


Based on Figure 3, below, the GDP of countries with a lot of coal in their mix seems to grow more quickly than other countries.

Figure 3. 2009-2011 Average Real GDP % Growth, Based on USDA International Macroeconomic Data Sets. World GDP reflects 2005$ weighting.

Figure 3. 2009-2011 Average Real GDP % Growth, Based on USDA International Macroeconomic Data Sets. World GDP reflects 2005$ weighting.

In recent years, oil has been the most expensive of fossil fuels. Thus, a country that uses mostly oil will, on average, have higher energy costs than a country that can dilute out its oil use with the use of cheaper fuels.

Figure 4 below shows average  oil, natural gas, and coal prices for some representative categories of these fuels.

Figure 4. Price per barrel of oil equivalent, based on World Bank data.

Figure 4. Price per barrel of oil equivalent, based on World Bank data for the period Jan.- Nov. 2012. All prices have been converted to a barrel of oil equivalent basis.

Among the types of fuels shown, oil is the highest-priced. The coal price is much lower, especially if it is locally produced. If it is transported long-distance, the cost of transport will add to its price. Natural gas prices vary around the world, but tend to be between coal and oil prices.1 It is not possible to know exactly what the average fuel price of each country group shown on Figure 2 and 3 is, but we can make a rough approximation using the average prices shown in Figure 4. Such an approximation is shown in Figure 5.

Figure 5. Rough estimate of average cost per barrel of oil equivalent for the various countries and groups shown, based on distribution of fuels used, from BP Statistical Review of World Energy, and prices from Figure 4.

Figure 5. Rough estimate of average cost per barrel of oil equivalent for the various countries and groups shown, based on distribution of fuels used, from BP Statistical Review of World Energy, and prices from Figure 4.

A person can see from Figure 5 that the average cost of fossil fuel energy is higher for the countries at the top of the chart, and lower for those near the bottom of the chart. There are various adjustments that might be made, such as adding the effect of carbon taxes on fossil fuel to the costs for European countries, and adjusting for the low value of the Euro recently. Both of these would tend to raise the average cost of fossil fuels for European countries.

Also, the world average fuel cost is probably overstated in Figure 5. In my list of country groups analyzed, I purposely excluded major oil exporters, such as Saudi Arabia, since these can be expected to behave differently than other countries. Quite a few of these exporters can afford to subsidize oil costs for their own people and for manufacturing within their countries, because their actual oil extraction costs are lower than the world oil price. If we were to adjust for this, the world average fuel price in Figure 5 would probably be reduced.

The Figure 5 averages include only fossil fuels (coal, oil, and natural gas), and exclude other fuels such as nuclear, hydroelectric, wind, and solar PV. Fossil fuels represent 92%-93% of energy supply in China and India, based on BP Statistical Review of World Energy data. In Europe, fossil fuels represent 79% of total fuels; in the US and Japan, they represent 86% to 87% of the total.

A Look at How Fuel Consumption Is Actually Changing

Oil consumption is decreasing in the countries with relatively slow GDP growth, and increasing in India and China:

Figure 6. Percentage growth in oil consumption between 2006 and 2011, based on BP's 2012 Statistical Review of World Energy.

Figure 6. Percentage growth in oil consumption between 2006 and 2011, based on BP’s 2012 Statistical Review of World Energy.

I would interpret this to mean that as the weaker economies (which tend to use a higher proportion of oil in their energy mix) are priced out of the market, more of the oil is going to the countries that can leverage its use better. Unfortunately, a barrel of oil saved by Europe, the US, or Japan, means another barrel that can stay on the world market and be used by China, India, and other developing countries with better leveraging.

A barrel used in the developed world would “only” be leveraged up by other fuels by roughly a factor of 2.0 to 2.75, and some of this leveraging would be hydroelectric or nuclear electric, which is fairly benign from a carbon dioxide point of view. If that same barrel of oil is instead used by China, it can be leveraged up by a factor of 5.7. Thus a barrel of oil saved by the developed world can be transferred to China and used to greater positive effect, from the point of view of producing cheap consumer products and a greater negative impact, from the point of view of CO2 impact.

What did Economists Miss?

Unfortunately, the list is rather long.

1. The most basic issue economist missed is that energy is required to make goods and services. If production of a product is transferred to another country, that country will need energy supplies–probably cheap, easy to extract, energy supplies–to make that product. It doesn’t make much sense to look at fossil fuel consumption, stopping at a country’s own borders. If we want products to be made in an environmentally sound way, and we want our own citizens to be employed, we need to make them at home, and figure out a better way of counting CO2 production.

2. World oil supply is constrained. This means that even with additional demand, oil supply can’t rise very much. Additional demand doesn’t do much more than raise price. A reduction of demand, within a range, simply reduces price, without really reducing production. Beyond a point, a reduction in demand does temporarily reduce both price and production, as it did in 2008. But demand is likely to quickly bounce back, leading to another price spike, and further constrained supply. Standard economic models seem to assume this situation can’t exist.

3. In a situation of constrained oil supply,  if a country reduces its oil consumption, it doesn’t mean that more oil will be left in the ground. Instead, the oil saved goes back on the world oil market (perhaps at a slightly lower price) and is bought by someone else who can make better use of it.

4. The mix of types of energy used by a country changes very gradually over time, because it is very difficult to substitute one kind of fuel for another without significant investment (for example, modifying cars to use natural gas and building pipelines for the natural gas). In general, for the short term, the mix is fixed. For example, in Figure 7 below, the world oil leverage remained constant in the period prior to 2000. It then gradually increased, as oil prices rose. There was no big change when the 2008-2009 recession hit. A drop in oil consumption tended to lead to a drop in electricity consumption as well, and a drop in fuel use of all kinds.

Figure 7. World oil price (Brent) in 2011$ from BP's 2012 Statistical Review of World Energy and Leverage based on ratio of total fuel consumption to oil consumption from the same report.

Figure 7. World oil price (Brent) in 2011$ from BP’s 2012 Statistical Review of World Energy and Leverage based on ratio of total fuel consumption to oil consumption from the same report.

I have written about this issue in my post, How Is an Oil Shortage Like a Missing Cup of Flour? In that post, I pointed out that to the extent proportions are fixed by built infrastructure, if there is a shortage (or excessively high price) of one necessary input (oil in the case of the economy; flour in the case of a batch of cookies), it is necessary to make a smaller batch. In the case of an economy, a smaller batch looks like a recession, with lower oil use, lower electricity use, and lower employment. This same pattern of all three types of fuel use dropping simultaneously can also be seen when viewing recent changes in world oil, coal, and natural gas supply, in Figure 1 at the top of this post.

5. If an economy such as China is not growing as fast as it might otherwise grow because of constrained oil supply, the availability of additional oil on the market because of the Developed Countries cutting back in their use may help China’s economy grow. In fact, China is likely to be able to use the additional oil (as for truck transport) to make it possible to make more goods using coal. Thus, the savings in oil may theoretically lead to increase in coal consumption, on a world basis.

6. The statement is often made that once oil prices rise high enough, renewables will become competitive. This statement is made with blinders on, in a world market for goods and services. What matters in a world market is the lowest total cost of production. Most renewables aren’t even oil substitutes; they are coal or natural gas substitutes, and these are cheaper. Anything that raises the average energy cost of a country relative to other countries makes it less competitive. When  a  country less competitive, it tends to use less oil. The extra oil tends to go to a more competitive country, and may help raise coal usage. Obviously wages make a difference, too, but a country that uses cheap fuels can pay their workers less, and still provide an acceptable standard of living.

7. There are two ways of reducing fossil fuel use that might be effective, but probably would not be well received. One is to cut back on international trade, perhaps by reintroducing taxes on trade. This would reduce fossil fuel usage, because many goods cannot be made without imported raw materials from elsewhere. Another method that would work is to tax (or forbid) fossil fuel extraction in your own country. This would make your country poorer, and less able to buy imports (such as oil and gas) on the world market.

8. I talked about what seems to be the effect of China’s competition on US jobs in another post. It would have been good if economists had foreseen this kind of impact before wholeheartedly endorsing the expansion of world trade.

9. It has recently been pointed out to me by a reader that the way China’s economy works, businesses can earn a lower rate of return than Western countries, and still provide an acceptable profit level, given the way Chinese government interacts with businesses. This gives China another competitive advantage, besides low fuel prices and low wages. See Rise of the FerroDollar.

Note:

[1] In the United States, natural gas prices are currently below the cost of production for many producers because of oversupply. This is not a sustainable situation; one possibility is that some natural gas producers will leave the market, US natural gas supply will drop with fewer producers, and US prices will rise.

Gail Tverberg's picture

Thank Gail for the Post!

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Discussions

Roger DePoy's picture
Roger DePoy on December 20, 2012
  • Economists must keep in mind that it's more than elegant theory...the market pays no attention to what it's supposed to do, it just reflects what is happening. Your point is very well taken..." Energy is required to make goods and services" . No one in their right mind is going to substitute expensive energy when cheaper energy is available. When the market presents cheaper alternatives, everyone will jump on board, but government can no more effectively legislate energy choice than they can legislate social policy.
Steve Offutt's picture
Steve Offutt on December 20, 2012

I'm unclear on where the pricing in your graphs comes from.  Figure 4 shows oil at over $800 per barrel.  That seems an order of magnitude too high.

Gail Tverberg's picture
Gail Tverberg on December 20, 2012

All of the prices are converted to Metric Tons of Oil Equivalent, using the conversion factors BP lists in its list of conversion factors. On this basis, a barrel is equal to .14 of a metric ton of oil.

Looking back at the caption, I see I made a mistake. I can fix it easily on OurFiniteWorld.com. It is hard to fix on the copies.

Thanks for pointing this out.

Adriaan Kamp's picture
Adriaan Kamp on December 21, 2012

 

Thabnk you so much- for opening-up this conversation.

I sense we all may benefit from better understanding the present relevance of conventionals in our free market economies, and start to craft smarter ways to become more balanced in our economies. 

Rick Engebretson's picture
Rick Engebretson on December 21, 2012

Your presentation, as always, is great. But please consider an outside the box scenario that could greatly alter projections.

The cheapest, most widely distributed energy is solar energy. Often solar energy has a large negative value requiring air conditioning or shade cooling. But markets put a high premium on carbon based fuels.

Perhaps the largest value added process in human history would be the conversion of solar energy into chemical fuel energy. Some might call this "solar fuel."

Some might also confuse such a concept with photosynthesis, and join a long list of biofuels critics and make progress difficult.

My concern is that we will repeat the failure (refusal) to recognize the importance of new technology such as LCD display technology. All the world is looking for better fuels options and sees the sun shining and has plenty of organic waste to dispose of.

Your analysis of extant facts is food for invention.

Gail Tverberg's picture
Gail Tverberg on December 21, 2012

Time is a critical variable now. We don't have years and years to figure out a solution. Also, our built infrastructure would literaly cost trillions of dollars to replace with something using a new fuel. Such a change can only happen very slowly. These issue make moving out to new technologies very difficult.

Rick Engebretson's picture
Rick Engebretson on December 21, 2012

I completely agree, we have been backed into a corner. But many others have not.

I think many new elements have entered the picture to exploit what can be a very primitive technology.

First, the chemical technology can be as primitive as the chemistry of fire itself, without the air. The red hot coals that convert wood cellulose to fuels can quite easily be provided by solar optics without consuming the fuel. This certainly fits UN goals.

And among the fuels produced from destructive distillation, methanol is already used to combine with fatty acids (from eg. soybeans) to manufacture methyl esters (biodiesel). There is no reason the low grade tars can't be hydrolized to acids and methylated. The aromatics in bitumen need to be highly refined just to unglue it from sand anyway, and various alcohols are pharmaceutical solvents.

Finally, I think some new concept cars like the Chevy Volt are a quantum leap technology. Basically, for maybe the first time, the wheel is separated from the piston. The torque problem is converted to an electrical generation problem. Microturbines are interesting mobile generators that don't need gasoline BXT.

My question remains whether the US is still capable of innovation leadership. Having been encouraged during the sputnik era, watched the space program grow, been part of technology change; I must say the US is now an entirely different country. We can't even figure out how to shrink the rate of growth of debt and dependency. And I'm at a loss how some of these touted renewable energy systems passed a high school science fair.

Nathan Wilson's picture
Nathan Wilson on December 21, 2012

That's a tough choice:

- Carbon taxes and other Polluter-pays systems are said to be more "efficient" at reducing emissions for the lowest cost.

-  Taxpayer-funded subsidies of clean energy can keep energy costs lower, therefore they cause fewer manufacturing jobs (and their resulting emissions) to move over-seas.

I suppose a reasonable compromise (that some Europeans countries use?) is for consumers to pay higher energy costs that subsidize low cost to industrial users.  We can always encourage industrial users to reduce energy use via efficiency standards.

dennis baker's picture
dennis baker on December 23, 2012

It is not difficult to realise that under pressure from environmentalists Coal has re-evaluated the price of Coal to compete.

Money with out moral or legal accountability

In my opinion



We need to replace the fossil fuel power plants, the primary source of GHG. Now!

At a scale required to accomplish this task :

Ethanol starves people : not a viable option.

Fracking releases methane : not a viable option.

Cellulose Bio Fuel Uses Food Land : not a viable option

Solar uses food land : Not a viable option

Wind is Intermittent : Not a viable option



All Human and Agricultural Organic Waste can be converted to hydrogen, through exposure intense radiation!

http://www.huffingtonpost.com/social/DennisearlBaker/2012-a-breakthrough-for-r_b_1263543_135881292.html

The Radioactive Materials exist now, and the Organic waste is renewable daily.

Ending the practice of dumping sewage into our water sources.

Air, Water, Food and Energy issues, receive significant positive impacts .

Reducing illness / health care costs as well !



Dennis Baker

Penticton BC V2A1P9

Steven Scannell's picture
Steven Scannell on December 26, 2012

If we can think in common terms, rather than in corporate bottom line competitive terms, it's now crunch time to put a price both on future technologies obfuscation (negative), and as well a price on cooperation (positive). My complex systems have a common thread and that is to incentivize and penalize, what we (from a public trust perspective) want and what we don't. 

To this end a utility consortium is an absolute must have, foundationally. We need it now. 

 To have such this, the time factor, or effective time afloat, forced by climate, indicates we all want to be on the same team, so some compromises will be in order. The imposition of the grand overarching consortium and of the capital reformation measures, that are necessarilly concerned here, are within the parameters of both traditional utility and fair trade philosophy, notwithstanding impending emergencies.  The future of energy economics, therefore, is in the modeling and prototyping of various transformational systems, old to green. Such systems must take into account the needs and necessities of system overlap and the potential risks of mutiny, caused by old v green. So the perils of a mutiny while the ship is foundering can be the economists greatest opportunity. Economics preceeds and underlies machinery.  Order is a holistic and comprehensive energy system design, which preceeds them both.  

Gail you say: "Also, our built infrastructure would literaly cost trillions of dollars to replace with something using a new fuel. Such a change can only happen very slowly."  Don't bet on this assertion. CAES is now used to augment gas turbines, and this can also be done with coal with minimal retooling. Any steam plant can be supercharged with compressed air. Green "fuels" such as compressed air and hydrogen, the miracle fuel, or as I call it "frozen electricity", are able to be shipped and stored in pipes, and so the economists job is to prototype the (consortium based) business cycle that will achieve this. It's complex, but it can't justifiably be dismissed. The bio-fuels and other fuels mentioned in above posts, combined with new green fuel standards, comodified, enter the economic fray, struggling, but I would say you have grossly overstated the problem, in both cost and time.  The job of the economist is to judge systems and model them into the future, so stop the trite dismissiveness. This is just running away. Please risk failure by embracing possible models, at least from an academic stance.  From new green grids, to the green fuel input production systems, to the output usages of green melted into the old, your task is daunting.  Let's put our best foot forward, as my mother would say. Coal is wonderful because it fits well with (and this is not necessarily competitve) green grid fuels, which obviously could trend fossil fuel demand down, with some initial support.  Let's model what drives the initial green fuel augmentation of steam plants. 

Or in seamen's nominclature we must all turn to. To me leadership in our situation rests at the economists feet first. And the economics of this, I say, are most definitely consortium based. Time and tide wait for no man. As in fisheries work, I find the energy economists perspective generally rooted in much old world detail.  Economics of energy are solidly planted in the logic of the status quo, masked by great detail, as in our onrunning fishery disasters. The needed economic completed works are solid green fuel and grid models as drivers for change, hence the consortium model is indicated here, as a green grid is a big expense. And we're not talking any port in a storm, as the consortium must have a viable mission.  Our energy crisis is like a crying baby, left in a room alone, to cry itself out. Please nurture futuristic ideas with modeling. Things just won't work themselves out.  Shifting from fossil to green is not a major unsolved design problem for me. www.environmentalfisherman.com

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