Energy Decline and National GDP in 2050

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The Growth of Destitution

Introduction

In an earlier article, "World Energy to 2050" I derived a scenario for the changing global energy supply picture between now and 2050. The conclusion in that article was that due to the rapid decline of oil and natural gas supplies, the total energy available to the world would drop by about 30% in that time. That single figure, however, doesn't tell us much. The picture is dramatically complicated by the fact that the world will be forced to transition from an energy economy largely based on fuels (oil and natural gas) to one based primarily on electricity generated from a variety of sources. In addition, most of the world's population growth in that time will occur in the energy-poor and economically-poor developing world.

In order to gain more insight into how changes in energy will affect different parts of the world, this article will examine the impact of energy declines in specific countries. We will disaggregate the global picture presented in the baseline energy article, and apply those changes to the specific energy circumstances of individual nations. Those energy changes will be translated into their effect on national GDP. The national population changes projected by the UN Medium Fertility Case will be used to translate the national GDP changes into average per capita GDP changes for each country.
The examination of changing per capita GDP, driven by changes in the energy supply and national populations, will help us understand the distribution and extent of wealth and poverty over the next half century.



Methodology

National Energy Budgets



The analysis in this article is supported by the global model of energy trends referenced above, that defines an individual supply curve for each energy source - oil, gas, coal, hydro, nuclear, solar and wind power.

In order to apply this to individual countries or regions, I started with the national energy consumption figures for 2006 found in the BP Statistical Review of World Energy 2007. To establish each country's consumption in 2050 I multiplied their current use of each energy source by its production increase or decline factor derived from the model

In the case of renewable energy, which is not included in the BP data, I used an ad hoc approach to add some amount of renewable energy to each country's budget. To do this, I took the basic energy budget determined in the first step and increased it by 5%, 10%, 15% or 20%. The assignment of a particular percentage to a given nation was to some extent arbitrary. It was based on their current energy wealth and their current activity in the field of renewable energy. As a result, countries like Denmark and Germany were given 20%, countries like Canada and Australia were assigned 15%, countries like Indonesia, Poland and Portugal gained 10%, and nations and regions like Pakistan, Bangladesh and most of Africa were given 5%,

I recognize that these approaches for both classical and renewable energy ignore probable differences in supply evolution in individual countries - some countries may develop hydro power at a faster rate than the model suggests while others lag behind, for example, and some nations may develop a "Manhattan Project" approach to wind or solar. Given the great degree of uncertainty inherent in this projection, though, I felt that such an approach was good enough to give the reader a feel for the nature and magnitude of the changes we may see over the next forty or fifty years.

National GDP



The standard economist's position on the influence of energy on the economy has been based on a theory developed by Robert Solow in 1956. In Solow's analysis economic growth was driven by two factors, capital and labour, both of which were quantified financially. 70% of the money flow in the world goes to labour as salaries, 30% goes to capital as rent, dividends etc. Solow used the Cobb-Douglas equations to map the growth function of an economy as labour and capital increased. He got nice curves,they under-predict observed economic growth by two thirds.

As reported in David Strahan's excellent book, "The Last Oil Shock" (pp. 116-123), two physicists, Reiner Kummel and Robert Ayres, independently observed the global economic slowdown following the oil shocks of the 70s and 80s and wondered if the role of energy in the economy was being under-valued. Their analysis convinced them that the price of oil (which was used by Solow in his analysis) underestimated the productive contribution of oil by a factor of ten. In other words, to truly reflect the contribution of oil to the economy, it should be priced about ten times higher. They developed their own economic model that started from Solow's work but incorporated their findings about oil's productive contribution, and found that their predictions matched observed economic growth perfectly.

The models by Kummel and Ayres predict that for every 1% increase in energy inputs you get about a 0.7% increase in GDP on average. The immediate implication is that a reduction of 1% in energy will cause a corresponding 0.7% drop in GDP. So if the the world's oil supply were to decline by 30% the global GDP would lose 23% of its value.

Once the national energy budgets were established by the method described in the previous section, I calculated their impact on GDP using the above ratio:a 1% energy change gives a 0.7% change in GDP.

As with the energy budget calculations, there are significant caveats. The ratio observed by Kummel and Ayres is by no means axiomatic. Many factors peculiar to a given country will act on its GDP, driving its performance away from the projections of a simplistic one-number model. On the other hand, the same observation that was made above also applies here: given the inherent uncertainties, this approach should suffice to give the reader a feel for the shape and size of the coming changes.

National Population and Per Capita GDP


National population figures for 2006 were obtained from the CIA World Factbook. The figures for 2050 were obtained from a private re-publishing of the projected medium-fertility data from the United Nations Population Fund report of 2001. National GDP figures were also obtained from the CIA World Factbook. To ensure uniform comparisons they are Purchasing Power Parity (PPP) figures from 2006. Per capita GDP is derived by dividing the actual (2006) or projected (2050) national GDP by the actual or projected national populations.

Continued