Friday, June 14, 2013

The Wealth of Nations 2013

Yes, it’s that time of year again. It's summer time, and it's also the time of year when BP releases it updated data of world production and consumption of coal, oil, gas, and electricity. There are a few surprises this year...well surprises to me at least. But in general the overall trends are the same:  Brazil, India and China are growing while everybody else is stagnant. I'll start with the surprises, and then I'll present some graphs using data from the 2013 BP Statistical Review of World Energy workbook.


(1) The US economy (as measured in [TW-hrs] of electrical and mechanical work produced) decreased slightly in 2012 compared with 2011. This means that we are not putting the work we generate to good use. Countries like Brazil, India and China are putting the work they generate to good use. The US (like a lot of other countries) is getting ~0% return on work invested. The reason that this is a surprise to me is that I'm confusing the feeling of growth recently (since Nov 2012), and forgetting that in 2012 the US was focused on the 2012 election rather than trying to grow its economy. 
(2) Japan's economy grew by 3%. This was a surprise to me because they shut down all of their nuclear power plants. I was expecting to see their economy significantly shrink in size. So, you could understand why I was shocked to see Japan's rate of growth exceed the US's rate of growth. (To put it sarcastically, an election in the US can cause more economic damage than a tsunami that causes a country to shut down all of its nuclear power plants.)
(3) China's economy continues to catch up with the U.S. economy. China's rate of growth was 5%/yr compared with the -1%/yr for the US. If China maintain a rate of growth that is 6%/yr larger than the U.S., then in roughly a year and a half years China will be able to generate as much electrical and mechanical work as the U.S. This means that when I do this calculation again using the 2015 BP Statistical Review of World Energy, there is a good chance that China will have the world's largest economy in terms of economic output as measured in [TW-hrs].
(4) The purchasing power parity GDP (i.e. PPP GDP) is a pretty good reflection of the wealth of country, i.e. the capability to do mechanical and electrical work. However, the calculation of the GDP appears to be biased against a few countries, especially Canada and Russia. I can understand why it would be biased against Russia (i.e. black markets and collective farming), but I have no clue why the IMF and other world organizations consistently underestimate the size of Canada's economy.  (Any ideas?)

So, now I'm going to present the data in graphical form. If you are interested in seeing these graphs for prior years (as well as a discussion of the methodology), check out the graphs from previous posts in 2011 and in 2012 on the Wealth of Nations.

First, 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. 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 2012. Well below China and the U.S., we see that Japan and Russia are tied for the third largest economy in terms of work. India is right on Japan's and Russia’s tails.


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 2012 / Work Generated in 2000) ^ (1/12)] -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. The U.S., Canada, Japan and E.U. have had virtually stagnate economies over the last twelve 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. 

   But let's move on and discuss the following graph, which shows the total amount of electrical and mechanical work generated on the x-axis and the 2012 GDP PPP in Trillions of $USD. The GDP PPP is an average of the value calculated by the IMF and the value calculated by the CIA World Factsheet.


I've separated the data into U.S., Japan and Europe (in blue) and Brazil, Russia, India, China, and Canada (in red.) If you fit a power-law distribution line through the blue data, you obtain a curve that sits higher on the graph than a power-law distribution line through the red data. This is mostly due just to Russia and Canada falling so far below the rest of the countries. As mentioned above, I understand why economicists are underestimating the size of Russia's economy, but I have no clue how economists are so underestimating the size of Canada's economy compared with the size of the economy of countries that generate the same amount of electrical and mechanical work, such as Brazil and Germany. The same story goes for Russia compared with India and Japan. 

The black curve above is a power-law distribution line through all of the data. It should be noted that the value of the exponent that best fits the data is not 1.00, which it should be in theory. The value is closer to 0.85, which means that something is missing from the analysis or from the theory. I'll discuss this more in future posts.

Finally, I want to show a graph with a possibly disturbing trend (but one that can be fixed really easily.) The Reserves to Production ratio for natural gas in the US has been decreasing the last two years. So, while there is a lot of new production from shale gas in the US, we aren't seeing enough exploration of new wells. The problem is that we seem to get stuck in cycles of exploration here in the US, i.e. there are times of no exploration because the NG price is low and there are times of rapid exploration when the NG prices are high. It'd be nice if the large fluctuations in price could be dampened out with a little bit of foresight by the industry and by local governments. (On a more upbeat note, the reserves to production ratio for coal in the US is 239 years. There's plenty of coal in the US...we just need to figure out more cost effective means of capturing and sequestering the CO2 generated at power plants. The R/P ratio for coal in China is only 33 years...of course, the problem with this number is that China's coal reserves haven't been updated recently, so this R/P number for China is really just a shot in the dark.)




And now, I'd like to end this post on both a positive and a negative note:  We in the US have the capability to change our habits and return to growth. We just need to invest the electrical and mechanical work we spend on projects that can yield higher rates of return on work invested. In other words, we need to increase the amount of money we invest in the underlying cycle of growth  (i.e. power plants, chemical refineries, steel mills, oil&gas drilling, coal mining, as well as the factories that build the equipment used by these companies.) This means decreasing the amount of money we spend on vacations, drugs, political elections, yachts, gov't waste, etc... and increasing the amount of money we spend on the underlying cycle of growth mentioned above.

I do want to point out that this underlying cycle of growth (i.e. power plants, chemical refineries, steel mills, oil&gas drilling, coal mining, as well as the factories that build the equipment used by these companies) doesn't have to be nuclear & fossil fuel based. It might be possible in future to be based off of the sun. The fact that solar PV panels continue to decrease in price is a hopeful sign that we could one day base a cycle growth off of renewable energy (i.e. solar panels, batteries, hydrogen transportation vehicles, H2-based chemical refineries, H2-based steel mills, and factories that make the equipment for these companies.) However, we are still far away from that day. The proof that renewable energy technologies are here-to-stay (and not just parasitic off of the real economy) will be the day when there is a city that (a) operates completely off of local renewable energy, (b) does not consume any fossil fuels, (c) does not rely on inputs or exports of any items that consumed fossil fuels or fossil fuel derivatives, and (d) is growing economically.

So, let me end on this note, which is intended to help people see the forest for the trees. Do we in the US want to become the next England, the next France, the next Rome, or the next Athens/Sparta? History is full of stories of countries in decline after years of strength and power. The way to avoid becoming the next "has-been" is really simple: (a) focusing on this world (not the next); (b) population and economic growth; (c) science based on experimentation and exploration (not pie-in-the-sky...like string theory and multiverses); (d) military strength; (e) rule of law; and (f) substance-based, democratic elections. 

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