Tuesday, May 29, 2018

Models Versus Reality...Exploring the Discrepancies in EIA Data Versus Forecasts

I'm a little slow in getting around to reading things but just finished going through the US Energy Information Administration (or EIA) 2017 International Energy Outlook (IEO'17...linked HERE ).  The reports base case is that total global energy consumption will rise by 28% from 2015 to 2040.  Just a short note today regarding why I believe the highly regarded and heralded assumptions of the EIA are terribly wrong.


THE WORLD
Since 2010, the discrepancy between expected growth in energy consumption versus actual observed consumption has been rapidly growing.  The chart below shows total global energy consumption from all sources (petroleum, natural gas, coal, nuclear, and renewables) from 1985 through 2030 in quadrillions of BTU's.  The downturn of the '09 financial crisis is clearly visible and the rebound of 2010 through 2012 also plain.  However, less well understood is the global stall in energy consumption from 2012 through 2015 (latest available data) versus the forecasted continuation of growth in energy consumption (due to forecasted economic growth).  The discrepancy has grown from a "rounding error" of less than 1% in 2010 to nearly 7% in 2015 (update: EIA states the real discrepancy is only half as much or 3.5% due to differing handling of non-electricity-related renewables in the IEO'17 vs. IES)...either way, this still means the global forecast for growth from '10 to '15 is off by somewhere between 35% to 70%!  Probably worth digging into the details.
OECD
The IEO'17 suggests the OECD will see growth of 22 quadrillion BTU's by 2040 (charts only show through 2030) or 14% of the growth.  First off, the OECD energy consumption (according to the EIA IES data) has been falling since 2007 and shows no signs of slowing its decline, let alone growing.  No concrete rationale is offered why consumption declines or outright increases would take place.  Second, the IEO'17 forecast assumes OECD consumption, as of 2015 was 11 quadrillion BTU's greater than actual observed consumption.  Basically, the forecast starts way off and then travels in the wrong direction...indefinitely.

Why indefinitely?  The chart below shows the combined 15 to 60 year old versus 60+ year old populations of the US, Canada, Europe, Japan, and Australia/NZ (yeah, missing a couple OECD nations).  The core population that drives economic activity and energy consumption has been declining since 2007...just like energy consumption.  The growth of the core populations of the consuming nations drive an inordinate amount of economic activity and consumption.  Since they have begun declining, nothing is the same, nor will it likely be again in our lifetimes.
Among the strangest of forecasts is the OECD Europe (not including Russia and Eastern Europe).  Energy consumption among the fast falling core of Europe is anticipated to suddenly and inexplicably reverse itself (chart below).

Plus a peak at OECD Europe's 15 to 60 year old population versus 60+ year old population.
Of course, if Russia and Eastern Europe were included, the picture turns downright ugly (chart below, Europe in total).
CHINA
China is projected to be 24% of the consumptive growth, or an increase of 39 quadrillion BTU from '15 to '40.  It is assumed that Chinese energy consumption per capita will continue rising spectacularly despite the shrinking domestic core population and shrinking core of developed importer nations.  However, again the forecast data and observed data have significantly deviated.  While China is de-emphasizing coal, and growing their renewable, natural gas, and consuming more petroleum...net-net, they don't appear to be seeing growth in their total energy consumption since 2012.

And again, looking at population data seems to offer a good reason why the forecast is off and likely to get significantly more off.  The 15 to 60 year old core population of China peaked in 2011 and will be falling indefinitely.  There seems a strong likelihood that China will see little or no growth (or more likely declines) as the OECD nations have seen because of the strong linkage with the core population and energy consumption.  Of course, there may be mitigating factors such as rural populations world-over move to urban settings but this seems to only be staving off a larger decline rather than really moving the needle.

REST of the WORLD
The RoW (rest of the world...outside the OECD, Africa, India, China) is projected to see 35% of the growth or an increase of 56 quadrillion BTU's.  However, given that the RoW energy consumption is rolling over, this appears to be suggesting that the far more positive population trends (below) are being trumped by the weakening growth and demand from the OECD and China.

RoW population data, core population not likely peaking until sometime around 2050.
INDIA
It is indicated that India will represent 20% of the consumptive growth or an increase of 32 quadrillion BTU growth.  But as with the RoW, positive population trends (Indian core population won't likely peak until 2045'ish) are being intruded upon by external weakness.  Absent a growing base of importers, hard to export your way to prosperity.

Indian 15 to 60 year old versus 60+ year old populations.

AFRICA
Africa is estimated to represent 7% of the consumptive growth or increase consumption by 11.5 quadrillion BTU growth.  However, the forecast data and observed data seem to be in significant disagreement about current energy consumption and the direction that African consumption is heading.  I think the slowing of the OECD and China is heavily influencing the activity taking place in Africa.  Unfortunately, Africa seems to have missed the credit enabled good times and seems ripe for the difficulties to come.

Finally, the surging African core population and slower growing 60+ year old population.

CONCLUSION
All the interest rate cuts, debt incurred, emergency programs, and tax cuts since '08 will never be able to fix what ails us.  A system twisted and made entirely reliant upon infinite growth in a very finite world was always like a bug on a freeway...it was just a matter of time.  But that splat may be felt soon...and then things get interesting as a new system and leadership will be needed to guide (or abuse) us out of the greatest depression that is dead ahead.