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.

About Catherine Wolfram

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.
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29 Responses to What the Heck Is Happening in the Developing World?

  1. robgramlich says:

    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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  3. Anonymous says:

    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:
    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.

  4. Azmat says:

    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’]

  5. Anonymous says:

    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. mcubedecon says:

    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.

  7. 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.

  8. roberthargraves says:

    Here at ThorCon International we focus on the electricity needs of the developing world, as presented in this graphic. https://app.box.com/s/0jn0njj0r8goiemp7bnw2nl497mrgdkg

  9. Dan Kammen says:

    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.

  10. James Roumasset says:

    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.

  11. Scott Sklar says:

    I agree with some of the comments that EIA projects are using basic supply and demand assumptions. But with extraordinary energy saving devices from LEDs, geothermal heat pumps, solar water heating, solar daylighting, super-efficient refrigeration – and much of it able to work directly from DC energy sources such as solar, small wind, pico- hydropower …neither the emissions, resource use, or tradition energy generation (and commensurate energy losses) will be realized as EIA projections. Scott Sklar, Adjunct Professor, The George Washington University (GEU) and Chair, Steering Committee, Sustainable Energy Coalition (Washington, DC)

    • robgramlich says:

      Scott, I agree this is happening. Is it inefficient long term to install a bunch of DC appliances that won’t connect up to the main AC grid when it arrives?

    • Bob Meinetz says:

      Scott, when powered by “renewable energy” even refrigeration which is super-duper-efficient won’t keep meat from rotting overnight, or keep water pumps from chugging to a halt during periods of prolonged cloudy or windless weather.

      These are substantial problems for people with the same needs as you and I, but lacking wall current, unlike you and I.

  12. This blog is of particular interest to me given that the focus of my consulting practice has been on energy studies in the developing countries particularly West Asia and Africa over the last twenty years. The discrepancy in the forecasts year to year for the developing countries mentioned here is obvious and clearly points to the need for better long term energy forecasts.

    I would like to point out, however, that the same forecasts sighted here are consistent with observations and conclusions of various studies we did of various developing countries energy consumption. Here are few pointers:
    • The forecasts of both OECD and non-OECD countries are consistent in terms of the direction of growth and even in magnitude of growth particularly in the short to medium time horizon. Consumption is growing at a rate of 2% or less annually in the OECD countries while consumption in the developing world particularly China, India, and Brazil among others are growing at an average of 6 to 7 % annually at least through 2014.
    • It is interesting to note that the increasing energy consumption growth for say 2003 – 2014 for the developing countries are consistent with high optimism over economic growth in these countries during this period. A reading of the IMF country reports for a number of these countries reflects this optimism and warns of energy consumption significantly in excess of GDP growth.
    • It is also of interest to point to a number of factors that pretty much governed the growth in energy consumption and the rate of change of this growth in these countries during this period. For much of the period 2003 – 2014 the following pretty much ruled with regard to energy consumption in the developing countries with significant impact to short, medium, and long term energy consumption forecasts: significant growth in income registering high income effect in an atmosphere of heavily subsidized energy products, relatively high or higher economic growth, significant latent energy demand, highly inefficient energy conversion efficiencies, and the absence of residential, commercial, and industrial appliances and equipment standards and programs.
    • The same factors listed above were further assisted in pushing energy consumption higher by the severely lacking market, policy, and institutional framework in almost all developing countries particularly India, China, Brazil among others. This framework weakness is probably the major factor to explain the inability of developing countries to arrest or affect energy consumption that ultimately resulted in the forecasts referenced in this blog. It might be also of interest to note that it was only 2010 or about that we started to see a concerted attempt by the IMF to impact energy consumption through energy pricing and subsidy reform. I would refer the reader to the experience of the Philippines, Mauritania, and Indonesia among others in this regard.
    • I would last like to point out that given the material we are presented with in this blog goes to roughly 2014, I would bet that we will start to see quite a different picture of long term forecasts both in terms of direction and magnitude post 2014. The reason being, pessimism setting in regard to high economic growth rates and lower commodity prices and some progress finally being achieved in capacity building in some but not all developing countries.

    I welcome to be challenged on the points I raise above. I also welcome the opportunity to share my experience with the HAAS / Oxford Policy Management project. The developing world is concerned with how to plan efficiently energy infrastructure and does deserve if not demand our support.

  13. Bob Meinetz says:

    Catherine, over 22 years of predicting energy trends two decades in the future, EIA is an average of 17% off. If, on average, an analyst was off by 75% I would not likely not hire that analyst. I would be even less likely to hire the analyst who cherry-picked an outlier and assumed it was representative of the whole.

    Donald Trump, if elected, will solve the problem by eliminating the EPA, the EIA, and pretty much any other three-letter acronym which begins with “E” for “Environment”. Out of sight, out of mind.

  14. My name is Angelina LaRose, and I am the Director of EIA’s Office of Integrated and International Energy Analysis. Among my office’s scope of responsibility is the integration of the modeling and analysis that contributes to EIA’s International Energy Outlook.

    EIA was delighted to see this thought-provoking article (“What the Heck is Happening in the Developing World?” by Catherine Wolfram on the Energy Institute at Haas blog, August 8, 2016). We agree that understanding energy development in China (and the non-OECD area in general) is extremely important. Projecting the consumption levels in the rapidly growing economies of Asia has been challenging. In retrospect, we underestimated the ability of China to maintain unprecedented economic growth rates, and we overestimated energy efficiency gains.

    A further explanation of the differences, and the modeling enhancements EIA has undertaken to better reflect future world energy markets, can be found here: http://www.eia.gov/pressroom/responses/ieo/pdf/china_pwm-nobox.pdf.

    • Angelina, Another factor you may want to explain the difference in forecasts of the developing countries is the dropping price level of household capital goods as a result of increasing global trade over the time of the various forecasts. As I mentioned on 8/11, various factors play havoc with energy forecasts in the developing world. In our attempt to explain particularly electricity demand growth in West Asia, it was rising income, severely subsidized energy, and absence of energy efficiency in addition to lower priced household capital goods that explained massive growth in electricity demand. All one needs to do is to look at pictures of 5 to 7 levels story buildings of the Southern Hemisphere from China to Central America completely decorated with split HVAC units of SEER 4 to 6 a true nightmare to any energy specialist.

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