This article was originally published on 6/24/2014 by James Hamilton here.
Last week I was at the annual meeting of the International Association for Energy Economics in New York City. One of the many interesting presentations was by Professor David Stern of Australian National University describing his research with Zsuzsanna Csereklyei and Maria del Mar Rubio Varas developing some stylized facts about energy and economic growth.
Below is one of the figures from Csereklyei, Rubio, and Stern (2014). Energy consumption per person is plotted on the vertical axis, and GDP per person on the horizontal axis, both on logarithmic scales. Each dot represents the values for energy and GDP for one of 99 different countries in 2005. The slope of the relation implies that a country with 10% higher income than average would be expected to consume about 7% more energy than average.
Source: Csereklyei, Rubio, and Stern (2014).
The team also put together a fun animated gif showing this relation for each different year between 1971 and 2010. You can see the scatterplot move to the right as countries become richer over time, but the relation and its slope remain remarkably stable.
Source: Stochastic Trend.
The IMF estimates that world GDP increased by 27.7% (logarithmically) between 2005 and 2013. I used Csereklyei, Rubio, and Stern’s income elasticity of 0.7 to calculate what world petroleum demand might have been expected to be for each year since 2003 if the price of oil had not risen.
These calculations are shown in the red line in the graph below. By contrast, the blue line shows actual crude oil production, which increased only 3% since 2005. The gap between the two amounts to 13.5 million barrels per day by 2013, a shortfall of about 16% (0.7 x 27.7 – 3.0 = 16.4).
Blue line: actual world field production of crude oil and condensate, 2002-2013, in millions of barrels per day, from EIA. Red line: calculated by multiplying height of blue line in 2002 by exp(0.7 x [ln y_t - ln y_2002]) for y_t world GDP in year t, from IMF.
What happened to the 13 mb/d shortfall? Something else had to change to keep demand from rising, that something else being a rise in the price of oil. If we assume a long-run price elasticity of oil demand of 0.25, to achieve a 16% reduction in quantity demanded the change in the real price of oil would be expected to satisfy the equation 0.164 = 0.25 x [ln Pt - ln P2002]. With a price of oil of $60/barrel (in 2014 dollars) at the start of 2005, this would imply a predicted price of P2013 = 60 exp(0.164/0.25) = $116/barrel today, about where we are right now.
Steve Kopits (energy analyst and frequent contributor to the discussion at Econbrowser) was also at the IAEE meeting and raised an interesting observation. He noted that forecasts of the potential for future energy production by the companies that many may be counting on to meet future energy demand appear to be inconsistent with the relation between energy use and GDP growth that held for the last 40 years. For example, for the next 30 years ExxonMobil (NYSE:XOM) is anticipating an annual world GDP growth rate of 2.8% per year with only 1% annual growth of energy production, consistent with an income elasticity of 0.35, half the historically observed 0.7 elasticity. BP (NYSE:BP) has a similar forecast.
One possibility is that GDP growth is going to be slower than it has been. Another is that energy price increases are likely to continue.