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What the Heck Is Happening in the Developing World?

One of the most important energy graphs these days shows actual and projected energy consumption in the world, separated between developed and developing countries. A version based on data from the Energy Information Administration (EIA) is below.
Screen Shot 2016-08-07 at 8.38.43 PMThe vertical axis measures total energy consumption, including gasoline, diesel, natural gas, electricity from all sources, etc. – all converted to a common unit of energy (the Btu, or British Thermal Unit). It reflects commercial energy sources, but excludes things like firewood that people collect on their own. The horizontal axis plots time, and the straight lines reflect historical (actual) data while the dotted lines reflect projections.

Strikingly, the developing world – approximated on the graph as countries that are not members of the OECD – has already passed the developed world (in 2007) and is projected to consume almost twice as much energy by 2040.

To me, this suggests strongly that anyone worried about world energy issues – including climate change, oil prices, etc. – should be focusing on the developing world.

Unfortunately, I fear that we know woefully little about energy consumption in the developing world. The series of graphs below depicts our ignorance starkly.

Let’s start with China, which single-handedly consumed 22% of world energy in 2013 (still far less per capita than in the US). The vertical axis again plots total energy consumption, but this time it’s measured relative to 1990 levels. The black line plots actual numbers. For example, since the black line is at 3.5 in 2010, that means that by 2010, China was consuming 3.5 times more energy than it had in 1990. Pretty amazing growth! By comparison, US consumption in 2010 was only 15% higher than 1990 levels.

 

Screen Shot 2016-08-07 at 9.10.13 PM

The colored lines on the graph depict the EIA’s projections, published in different annual issues of the International Energy Outlook (IEO). If you stare at 2010, 2015 and 2020, you see that the EIA has revised its projections upward considerably over a relatively short time period.

Start with the light blue line at the bottom, which reflects projections that were part of the 2002 IEO. At that time, the EIA thought China would only consume twice as much energy in 2010 as it did in 1990. But, China’s actual consumption surpassed that level midway through 2003, 6.5 years earlier than projected. So, by 2005, the EIA had increased their projection for 2010 by 30%. That’s a huge upward revision.

But it wasn’t nearly enough. The EIA continued to increase its projection, struggling to keep up with China’s actual growth.

Ah, you say. This is just a story about China, where there are lots of possible explanations for underestimated growth in energy, including faster than expected GDP growth, rapid industrialization, etc.

But, similar stories emerge for Africa and India. The EIA has recently revised projections pretty dramatically, and most of the revisions are upwards.

Screen Shot 2016-08-07 at 9.12.13 PM

Finally, for India more than Africa, the projections have been too low.

Screen Shot 2016-08-07 at 9.14.02 PM

And, this is not a problem in the developed world. The figure below contains a similar graph for the US. Note that the scale is different than for the developing regions, so the revisions have been pretty miniscule in comparison. Also, they’ve generally been downward.

Screen Shot 2016-08-07 at 9.15.18 PM

A couple points to keep in mind:

  • It may seem like I’m picking on the EIA. I’m not trying to. They are doing an incredibly important job with very few resources. (The International Energy Outlook was recently demoted from an annual publication to approximately biannual.) Also, the EIA are not alone. The International Energy Agency and BP – two other big names in world energy reporting – have also had to revise projections upward to keep up with energy demand in developing countries.
  • The EIA and other organizations are careful not to describe their projections as forecasts. The EIA, for example, notes that, “potential impacts of pending or proposed legislation, regulations, and standards are not reflected in the projections.” I doubt that omission explains the discrepancies in the developing regions, though. I have tried to back out how much of the underestimate is due to misjudged GDP growth, and I don’t think that’s a big share either, at least in China. I suspect that we need a better underlying model for how GDP translates to energy consumption in the developing world, the point of this academic paper.
  • Policymakers in the developing world appear to appreciate this issue. We recently launched a 5-year research project, funded by the Department for International Development (the UK’s analog of USAID) and joint with Oxford Policy Management, to study energy in the developing world, focusing on sub-Saharan Africa and South Asia. As part of this project, we hosted a policy conference in Dar es Salaam to hear from East African policymakers about the pressing issues they faced. One of the main themes that emerged was the difficulty of planning without better demand forecasts.
  • Some might argue that markets will solve this problem. The EIA is just some government agency that few are paying attention to, or so the argument might go. If you have real money at stake in understanding future energy consumption in the developing world, you would not hire someone who was off by 75% (3.5 divided by 2).

I do not know who is using the EIA projections for what, but I believe this logic breaks down for several reasons. For one, in many parts of the world, the private sector is not investing in energy infrastructure and the public sector may be relying on organizations like the EIA. Also, most investors don’t really care about 2040. Their discount rates are high enough that it doesn’t really matter what’s happening 25 years out. But, from the perspective of climate change, the world should care about energy consumption in 2040, 2050 and 2100.

This brings us back to the first graph in the post, which contained projections out to 2040. I fear that we are underestimating the 25-year out projections, just like we’ve underestimated recent trends. As researchers, we need to get under the hood and understand more about what is driving energy consumption in the developing world.

Catherine Wolfram View All

Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, Co-Director of the Energy Institute at Haas, and a Faculty Director of The E2e Project. Her research analyzes the impact of environmental regulation on energy markets and the effects of electricity industry privatization and restructuring around the world. She is currently implementing several randomized control trials to evaluate energy efficiency programs.

29 thoughts on “What the Heck Is Happening in the Developing World? Leave a comment

  1. I was going to comment on the situation in the Philippines w/ reference to Ruping’s latest WP, but I couldn’t find it on the website.

    One point to be made is that forecasters typically underestimate energy-saving technical change, underestimate the price effect (either because the they think — possibly from short run studies — that demand is more inelastic than it is, or because they fail to distinguish demand from consumption), and underestimate the role of reliability.

  2. This is news? We can all use more accurate and updated modeling, and more so in ‘industrialized nations’ than developing ones, more often than not. This from 1994 ….

    Shlyakhter, A. I., Kammen, D. M., Broido, C. and Wilson, R. (1994) “Quantifying credibility of energy projections from trends in past data: the U. S. energy sector,” Energy Policy, 22, 119 – 131.

  3. Actually for at least 2 decades now it has been obvious that if the energy consumption of the pacific rim achieved 1/5 of the per capita energy consumption in the USA, it will not be possible to extract enough carbon fast enough to meet the demand. This fact combined with accelerating climate change is why I quit my day job in 2005 to start my current pursuit. If humanity is to survive into the next millennia, energy can’t be free, but it can’t remain a zero sum game.

  4. This piece illustrates a bigger problem, at least from the perspective of analysts communicating with policy makers and stakeholders. Why are we presenting single-line forecasts as though they could possibly be accurate? Instead of trying to predict the mean outcome, we should be giving them the bounds on what we might expect. If the bounds are very wide, then we need to prepare for the potential risks across the range. If the realized outcomes bust our bounds, then we need to reexamine the premises of our model. These single line forecasts are largely useless.

  5. On forecasting, George Box wrote that “essentially, all models are wrong, but some are useful”. finding the useful is a difficult task. a broken clock is right twice a day.

  6. The likely flaw here is that most projections assume certain growth rates in the variables that affect the output. And the variables themselves are not treated as variables, so that second/3rd etc order effects are ignored. As the indian economy grows continued growth will get ‘harder’ and the growth rate will slowdown –
    Look at the projections of growth for Africa – missed by huge margins for decades.

    Yes we should look at the ‘developing’ countries, but their 20-30% growths will have less impact than the OECD’s 3-5% growth on the amount of ’emissions’. Our emphasis must remain on the reduction of OECD energy consumption. [China’s growth in energy consumption has been significantly ‘fueled’ by manufacturing for OECD / this should actually be ‘counted’ as energy consumption in the places where the products are ‘consumed’]

  7. Actually, the EIA’s international energy forecasts ARE based on a private sector model. EIA’s system, called the World Energy Projection System Plus (WEPS+), is based on macroeconomic models from Oxford Economics. See the Modeling System Overview section of their model description:
    https://www.eia.gov/forecasts/aeo/nems/documentation/weps/pdf/m076(2013).pdf
    The EIA is scandalously under-resourced in my opinion, but these modeling failures are better attributed to the shortcomings of the methodology (i.e. the inputs and assumptions of these models too tightly constrain the outputs), not the provenance of the model or the budget of the modelers.

  8. And Americans use 40x more electricity than Sub-Saharan Africans, suggesting there is a lot of room for their usage to grow. They like refrigeration and air conditioning too. Luckily that region has plentiful low cost renewable energy and they are trying to develop it.

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