Saturday, June 21, 2014

Comparison of the Wealth of Nations: The 2014 Update

Yup, you guessed it. It’s that time of year again. BP just released their latest updates for the production and consumption of energy throughout the world. Before I get into the details of the analysis, I want to point out that there is one major change in my analysis compared with previous analyses that I’ve posted on this site. (These links go to the previous posts in 2011,  in 2012, and in 2013 on the Wealth of Nations.) The one change that I’ve done is that I’ve included a new form of useful work: coal consumption for non-power plant applications. In the developing world, ~90% of all coal is consumed in power plants. However, in places like China, the consumption of coal in power plants is only ~60% of total coal consumption. Therefore, in this update to the “Wealth of Nations” calculations, I’ve included a new term that takes 10% of the coal consumed for developed countries and 35% of the coal consumed for developing countries. This number is then multiplied by 10% to reflect the fact that the enthalpy content in the coal is typically only being converting into low-grade energy, whose exergy is only 10% of its enthalpy content. This is similar to the existing term I have for non-power-plant consumption of natural gas (i.e. NG for home-heating.) The main result of this additional term is that the useful work generation has increased in China by 14%, in India by 10% and in Russia by 3% compared with the useful work generation if this term were not included. If this term is included, then China’s useful work generation has been greater than the US’s useful work generation since 2011. In other words, China actually has had the world’s largest economy since ~2011.

Here are some other conclusions before I get into a detailed breakdown of the analysis for this year.

(1) The US economy (as measured in [TW-hrs] of useful electrical and mechanical work produced) increased by 1.8% in 2013 compared with 2012. This is much better than the -1.5% decrease in useful work output between 2012 and 2011.
(2) There were two countries with negative growth rates between 2012 and 2013: Japan (-2.0%) and the UK (-1.5%.) And there were two countries with near-zero growth rates: Germany (0.3%) and Russia (0.2%.) The major countries with the highest growth rates were: China (1.8%), India (4.4%), and Brazil (3.7%.)
(3) 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, when comparing developed economies (such as Germany, Japan, USA and UK.) However, the calculation of the GDP appears to be biased against a few countries, especially Canada and Russia, but also China and Brazil. I can understand why the IMF would be biased against Russia (i.e. black markets and collective farming likely aren’t being accurately reflected in the GDP calculation), but I still have no clue why the IMF and other world organizations consistently underestimate the size of Canada's economy. If I were a Canadian representative for the IMF, I would voice my concern that the IMF is underestimating the size of the Canadian economy by at least two fold.

So, now I'm going to present a more detailed breakdown of the analysis and present the data in graphical form. 

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 generated the most amount of total mechanical and electrical work in the world until 2011, when it was surpassed by China. Japan’s economy was the third largest back in 2000, but it has since been surpassed by India’s and will soon be surpassed by Russia’s if it doesn’t turn its economy around (i.e. re-start its shut-down nuclear reactors.) Brazil is growing rapidly and is now virtually tied with Germany and Canada for the sixth largest economy (as far as production of useful work…which is my definition of an economy.) France and the UK have the smallest of the ten economies I’ve analyzed so far. In future posts, I may start widening my scope and including economies such as South Korea, Saudi Arabia, Iran, South Africa, Mexico, Spain, and Italy.


Figure1: Total Work Generation 2000-13  (a) Linear Scale (b) Log Scale

The next graph (below) plots the yearly rate of return on useful work invested between 2012 and 2013. This is the growth rates listed above in the summary section. As mentioned earlier, China, India and Brazil put in the best performances, followed by Canada and the US. Japan is feeling a hangover from shutting down its nuclear power plants, but I’m not really sure why the UK is performing so poorly. This may be a hangover from hosting the 2012 Summer Olympics, but I’m not really sure. 

Figure2: Rate of Growth of Useful Work between 2012 and 2013

Figure3 (below) plots the average yearly rate of return on work invested between 2000 and 2013. The equation used to determine the rate of return was: 

 [(Work Generated in 2013) / (Work Generated in 2000)]1/13 – 1

This graph shows the long term average growth rates, and once again, we see that China, India, and Brazil have been doing well over the last thirteen years. Russia has been doing so-so over the last thirteen years, but I expect to see a major drop in the size of the Russian economy in next year’s analysis (due to the ramification of invading the Ukraine and a hangover from the 2014 Winter Olympics.)

Figure3: Average Yearly Rate of Growth of Useful Work 2000-2013

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 stagnant economies over the last thirteen years.  Yes, I would call a 0.5%/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 if we want to keep up with China. But this will not be easy because (a) we need to limit our CO2 emissions and this likely involves investing in energy technology will low rates of return on investment compared with traditional fossil fuel technologies, (b) we have an aging population, and (c) we seem reluctant to cut government waste for fear of the friction associated with going from dependency on the gov’t to being hired by the private section. Note that in (c), it goes both ways. Politicians seem reluctant to cut government waste and people dependent on government funds seem reluctant to move into the private section.

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 2013 GDP PPP in Trillions of $USD. The GDP PPP is the average value calculated by the IMF and the CIA (same averaging method as in last year’s analysis.)

Figure4: 2013 GDP PPP vs. 2013 Useful Work Generation

I've separated the data into U.S., Japan, France, Germany 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 economists 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 wrong either with my analysis, with the way that the IMF & CIA estimate the size of world economies, and some combination thereof. 

In a previous post, I've shown that there is a fairly strong correlation (i.e. a correlation coefficient of 0.80) between the US Historical Real GDP growth and the US Historical Useful Work Generation. Here, I'm including some more data that compares the supposed real growth GDP of China's economy with the growth rate of useful work. The geometric average growth rate of GDP for China from 2000 to 2013 is 10.0% per year, whereas the geometric average growth rate of useful work is 9.0% per year. This is fairly close; however, the correlation coefficient between the two data sets (2000-2013) is only 0.54, which is not particularly strong. Below, I have a graph that plots the inflation adjusted GDP growth rate with the useful work growth rate. In future posts, I'll work on trying to understand why the correlation coefficient isn't exactly 1.0.

Figure5: Comparison of China's Inflation Adjusted GDP Growth Rate with China's Growth Rate of Useful Work Generation

Next, I’ve plotted the Reserves to Production ratio (R/P ratio) for natural gas in the US. There is a noticeable upswing in the R/P ratio for natural gas in 2013. This is a good sign; however, as is well known, there was significantly consumption of natural gas in the Winter of 2014, and my guess is that we will see the R/P ratio drop in next year’s analysis. Of course, the main thing I want to point out here is that people shouldn’t freak out that we are running out of natural gas in the US. A R/P value of 10 does not mean that we will run out of natural gas in 10 years. The R/P ratio was 10 back in 1980, and was less than 10 in the 1990s, but it’s been steadily growing since then. The US Proved Reserves is not the same as the US Technical Reserves of natural gas. The US Proved Reserves is a moving number that depends on how much oil&gas companies want to tell banks that they have on reserve in order to borrow money to build equipment.

 Figure6: US Proved Reserves to consumption of natural gas 

The final graph plots the fraction of useful work production via the generation of electricity. The other forms of useful work being mechanical work (i.e. driving a car) and non-electrical-mechanical work from the combustion of coal&natural gas, i.e. the amount of work a heat pump would be required to consume in order to heat up something, like a pot of hot water, which is being heated up by the combustion of coal&natural gas. As one could guess, France is the most electricity-friendly of the countries I’ve analyzed. Almost 70% of the useful work is generated by power plants, and only ~30% is generated by cars and/or direct combustion for heating. Brazil is least electricity-dependent, with only ~57% of the useful work generated by power plants.

Figure7: Fraction of Useful Work from Electricity

And now, just like how I ended last year’s post, I'd like to end this post on both a positive and a negative note:  We all have the capability to change our habits and return to growth, even while reducing greenhouse emissions in the atmosphere. We just need to invest the electrical and mechanical work we spend on projects that can yield higher rates of return on work invested. Don’t spend money just to give people a job. All money can be used to give somebody a job. The question is: does that job help grow the production of useful work? If not, there will be less and less useful work available, which means that our lives will be harder, less enjoyable, and eventually will mean that there is less useful work to spend on science and space exploration.

Also, I 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) needs to eventually switch to being near-greenhouse-gas-emissionfree. We are still far-away from having the entire economy be greenhouse-gas-emission free, but we are making baby steps in this direction, but much more action to limit greenhouse gas emissions is needed.


  1. This comment has been removed by a blog administrator.

  2. Great post

    Do you think figure 4 is because

    A) eastern versus western nations
    B) free vs restrictive governments
    C) weather geography

    1. Sorry I didn't reply earlier.
      My guess is that the cause of the "two different lines" is the size of the black market economy.
      Having visited and studied the history of Russia, I'm aware that there is a huge black market economy. I suspect the same in Communist China and socialist Brazil.
      As for Canada, I suspect that people greatly underestimate the size of the economy in Alberta. Having worked for a company based out of Calgary, I know that they do a lot transactions with a handshake.

      Any thoughts on my guess?