Saturday, June 16, 2012

The Wealth of Nations Updated Again: Total Electrical & Mechanical Work by Country using the 2012 BP Statistical Review of World Energy

It’s that time of year again. The pools are open, and BP releases it updated data of world production and consumption of coal, oil, gas, and electricity. Let me start with the real attention grabbers, and then I'll back up the statements with data from the 2012 BP Statistical Review of World Energy and graphs created using that data.
1) China's economy is rapidly catching up with the U.S. economy. If China maintain a rate of growth that is 10%/yr larger than the U.S., then in roughly two years, China will be able to generate as much electrical & mechanical work as the U.S.  What is also significant is that, last year (2011), China passed the US in terms of generating electrical work. Though, China still lags behind in the U.S. in terms of mechanical work from vehicles and total work.  (Note that last year I estimated it would take three years to surpass in the US in total work, and this year that number dropped to two years.) Unless something drastic happens in the next few years, China will surpass the US in terms of economic output as measured in [TW-hrs] by the year 2013.
2) The nominal GDP is not a good reflection of the wealth of country, i.e. the capability to do mechanical and electrical work. Of the standard ‘economic’ means of measuring the wealth of country, the GDP based off of Purchasing Power Parity is the best match for reflecting the capability to do work (i.e. wealth). However, the GDP PPP rankings for Russia and Canada are significantly below their rankings in terms of capability to do work [TW-hrs].
3) The nominal GDP values assigned to countries appear to be biased towards the U.S., Japan and Europe, and appear to be biased against China, India, Canada and most biased against Russia. For example, Russia generates more mechanical and electrical work than Japan, but the IMF calculates that Japan's nominal economy is three times larger than Russia's. The calculations of nominal GDP do not account for all economic activity within a country. The rural, collective or black market activity in Russia, China and India might explain why the GDP values of these countries are less than for countries that generate similar amount of work.

I've updated the graphs from previous posts on the Wealth of Nations using the 2012 data from BP's Statistical Review of Energy. First off, I've calculated the total amount of work generated per year in each of the major economies. I calculated the total amount of work as: the electricity generation plus the amount of mechanical work (as estimated by the average fuel efficiency of vehicles in the country). This fuel efficiency was a function of time and varied from country to country. On average, this value is approximately 21%, i.e. 21% of the enthalpy content of the gasoline is converted into mechanical work and used to overcome road/air friction. This calculation assumes that (1) 100% of oil/biofuel consumption goes towards mechanical work, (2) 0% of oil/biofuel consumption goes towards electrical work, and (3) 0% of coal and natural gas consumed goes towards vehicle mechanical work. This is a safe assumption to make for coal (because there are no coal-fired vehicles to my knowledge), but it is only an approximation for natural gas use because there are ~1.7 million of natural gas power vehicles in Brazil, 1.1 million in India, and 0.6 million in China. However, the number of natural gas vehicles is small in proportional to the total number of cars in these countries: for example, Brazil has roughly 50 million vehicles; India has roughly 50 million vehicles; and China has roughly 63 million vehicles. (For comparison, the U.S. has roughly 250 million vehicles, of which only about 0.3 million are natural gas compatible.)
Note that this year (as opposed to previous years), I ignored the amount of work done by humans because, in the U.S., this average amount of work done by humans each day is 250 times less than the average amount of electricity generated each day. This year, like last year, I tried to account for the fact that natural gas is used to heat homes. The question is: does combusting fuel to generate heat (if there is no direct production of mechanical or electrical work) count towards the production of mechanical or electrical work? For example, in the winter, many homes stay heated by combusting natural gas to warm air that goes through vents in the house. You could image replacing the natural gas furnace with an electrical heat pump. The combustion process could be replaced by a process than would require electrical work to maintain the temperature difference between the home and the outside environment. To account for this forced gradient in temperature (either for home cooking or home heating), I assume that 60% of the natural gas consumed by a country goes into generating these temperature gradients and does so in a way that is 10% efficient. (i.e. a heat pump would require 10% as much electrical exergy as the combustion process requires in chemical exergy to maintain the same temperature gradient.) These are the only assumptions made in this study. (Though, it should be stated that my results are completely dependent on the accuracy of BP's data.)
We can now start to analyze the results. As seen below, the US generates the most amount of total mechanical and electrical work in the world. It's been roughly 7,000 TW-hrs per year over this last decade. On the other hand, China's generation of work has gone from ~2,000 TW-hrs per year in 2000 to over 6,000 TW-hrs per year in 2011. Well below China and the U.S., we see that Japan and Russia are tied for the third largest economy in terms of work. Japan’s fall was largely due to the tsunami and shut down of nuclear reactors. If Japan decides to restart its nuclear reactors (and this now appears possible), it may be possible for Japan to reclaim the sole title of "Third Most Powerful [TW] Country." However, India is right on Japan and Russia’s tails. If Japan doesn’t act fast to turn around its economy, it is likely to fall below both India and Russia.

The next graph (below) plots the average yearly rate of return on work invested, i.e. the rate of growth in the ability to generate work in the countries. The equation used to determine the rate of return was:   {[(Work Generated in 2011 / Work Generated in 2000) ^ (1/11)] -1}
We can clearly see that China has the largest rate of return on work invested, followed by India, then Brazil, and finally Russia. (Hence the term B.R.I.C.) None of the other countries has a rate of return on work invested greater than 1%/yr. This is quite sad for what we call the Western Countries. The U.S., Canada, Japan and E.U. have had virtually stagnate economies over the last eleven years.  Yes, I would call a 0.6%/yr rate of return on investment a poor showing for the US over this time period. This has been a lost decade economically for those of us living in the US. We should be aiming for at least 5%/yr, and more than 5%/yr that if we want to keep up with China. We have to want to grow. We can’t just blame politicians in Washington because we elected them. We have to look at ourselves and ask the question: am I earning greater than 5%/yr on the money I invest? If not, something needs to change. (To be honest, my stock market investments over the last decade have averaged much less than 5%/yr after inflation, and my bond & other investments have likewise averaged less than 5%/yr after inflation, so I need to take my own advice and change my investment strategy in order to achieve higher rates of return on investment.)
The fact that China has a growth rate roughly 10%/yr greater than the U.S. means that 2013 or 2014 will be the year that China surpasses the US in terms of economic output as measured in [TW-hrs]. Very soon, the U.S. will no longer be the largest economy in terms of capability to do work. While China is a much more populous country than the US, the shock is that a semi-planned economy with a 1-child-per-couple policy, without the rule of law, and without democracy can out-perform capitalist, democratic countries like the US. China’s success surprises people like myself who value (a) the right to procreate, (b) the right to life, liberty & the pursuit of property, (c) the right to vote, and (d) the right to free speech. I think that the US Constitution & current Bill of Rights outlines the best form of government created so far, and this is why I’m dumbfounded as to how a country without a constitution or a bill of rights can produce such a stable and growing economy. But year after year after year after year, China keeps out-growing the rest of the world. Why? It think it’s because the Chinese want to grow economically and they want to grow militarily. In general, we don’t seem to have the same kind of drive in the West.
   But now, we’ll move on and discuss the following graph, which shows the percentage of work generated in a country that comes from electricity, i.e. the ratio of the amount of electricity generated to total work. China's economy is the closest to a pure electricity-backed economy (~78%) while Brazil’s economy (~56%) is the farther away because of the large amount of mechanical work generated in the country from vehicles. France's economy is the second most as far as the ratio of electrical work to total work generated (~70%). The generation of work in the US is roughly  60% electrical and roughly 40% mechanical.
Next, I've plotted the total amount of work generated on the x-axis and the nominal GDP in 2011 US dollars on the y-axis. Note that the International Monetary Fund's values of GDP are pretty similar to the values from the CIA’s World FactSheet. Ideally, there should have been a perfect correlation between the GDP and the amount of work generated. However, this was not the case, as seen below.

The nominal GDP values assigned to countries appear to be biased towards the U.S., Japan and Europe. And the nominal GDP values appeared to be biased against China, India, Canada and most especially biased against Russia. For example, Russia generates as much mechanical and electrical work as Japan, but the IMF calculates that Japan's economy is three times larger than Russia's. It's hard to believe that Japan's economy is really three times larger than Russia's because each country produces nearly the same about of mechanical and electrical work. If Japan's economy were really three times larger, then there would be signs of this wealth in terms of electrical and mechanical work. What I think is happening is that the IMF and World Bank are under-estimating the amount of economic activity in Russia. (In a country with a significant portions of collectivized farmlands and a large black marker, it's easy to mess up the calculation of GDP. Note that 7% of all arable lands in the world are either owned by the Russian state or are collectivized.) This means that the IMF and World Bank might not be correctly accounting for economic activity that stays within Russia. (Their calculations would correctly account for any sale of food or fuel overseas.) So, I'm guessing that the IMF and World Bank calculations are underestimating the economic activity in countries with large rural populations, and in economies with significant black market economies. Japan has an industrial, export-driven economy, and therefore, there is less chance for the IMF or World Bank to underestimate the amount of economic activity.
It should be noted that the IMF, and World Bank, and the CIA attempt to get around the problem of nominal GDP by publishing what they called the Purchasing Power Parity Gross Domestic Product (GDP-PPP). It turns out that the GDP-PPP appears to be a much better estimate of the wealth of country than the nominal GDP. Next, I've plotted the Total amount of Work generated on the x-axis and the GDP-PPP in 2011 US dollars.
We can see that there is a closer agreement between the GDP-PPP and the Total Work Generated than between the nominal GDP and the Total Work Generated. Though, if there were perfect agreement, all of the data points would lie exactly on the line and the trend line would have a power-law exponential of exactly 1.0. Instead, the data points don’t fit on the line and the power-law exponential is between 0.8 and 0.9. The data points fall pretty close to the line except for Canada and Russia. Note that the data points for India and China fall fairly close to the line set by the US, Japan, U.K., Germany and France, even though these data points were far from the line when comparing nominal GDP.

What we need is a measurable quantity for the wealth of a nation that is not subjective. The GDP (as calculated today either as nominal or PPP) is rather subjective because it relies on the concept of ‘final product.’ The idea of a final product is like asking for the end destination of a race track. Products are made in order to make more products. There is no such thing as a final product. Every product has value only in as far as it is capable of helping us make more products. Therefore, estimates of GDP will always be arbitrary, and this needs to be fixed. Instead, we must first establish what the hell the goal of life is (i.e. growing our capability to do work and growing life in the process), and then measure the amount and the growth in our capability to do electrical and mechanical work. The problem (as I stated in the last post) is that the trend is going in the opposite direction: we seem to be heading towards even more subjective definitions of wealth, such as [happiness life-years]. Why are we trying to make things more complicated than they really are?
You can see that, once you have the energy data from BP, it doesn’t take much work to determine the wealth of a nation. BP has done the hard job of calculating all the energy flows in society. What they should be doing is taking the next step and piecing together the different parts of the puzzle, i.e. calculating the capability to do work and ranking countries based off of their capability to do work. But since they aren’t doing this, I will continue to do this each year so that people know the real rankings of a country’s wealth.


  1. Kevin Masters (Boston, MA)June 20, 2012 at 7:56 AM

    Excellent analysis as always, and as I have previously commented, a measure of not only current work generation, but potential/capability to do work could and should be the anchoring determination for currency systems.

    Not to get too far out in from of the curve, but have you thought about how a major efficiency improvement would be handled in an energy backed system? For instance if cars were suddenly able to get 120mpg instead of 30mpg? While ultimately of benefit (having more energy 'available') wouldnt this type of technology advance lower the 'value' or energy stores (oil reserve for example)?

  2. Kevin,
    In my understanding of an energy backed system, the Federal Reserve would maintain a constant ~3 month average price for the cost of purchasing useful physical work (such as mechanical and electrical work.)
    For driving, the important factor is the cost per amount of work required to overcome air and ground friction. The cost of driving includes a lot of factors: insurance, fuel, and vehicle costs.

    So, the question is: does having a 120 mpg vehicle actually lower the cost per kWh of work expended to overcome air and ground friction? Since fuel is only one of the inputs into the cost of driving, the question really is: how expensive is this new 120 mpg vehicle levelized into $/kWh of driving? (This would be a similar calculation as for power plant CapEx in terms of $/MWh)

    Let me know if this addresses your question.
    Thanks for sharing your thoughts.