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June 29, 2005
Dampers for China's Oil Demand: Rising Income and Companies Like GE
China’s unquenchable demand for oil will keep energy prices high indefinitely, or so the popular thinking goes.
In a very interesting commentary, UC San Diego economics professor James D. Hamilton (whose specialty is oil shocks and their economic impact) writes that such an outcome is unlikely, based on past history.
Hamilton compared GDP per capita in 1960 with the rate of petroleum demand for the following four decades. He finds that the richer a country was in 1960, the lower its increase in oil consumption. The richest country in 1960 as measured by GDP per capita, the United States, has one of the slowest growth rates in petroleum use.
Moreover, as he looks at individual countries like France, Germany, and Japan over that time frame, it’s very clear that those countries experienced falling rates of petroleum demand as GDP per capita grew. Hamilton presents a graph of these three countries smoothed for cyclical factors:
Based on this analysis, the rate of growth in China’s demand for oil is likely to decline over time. Anecdotally, we see such evidence of the behavior of individual Chinese firms, whose costs are being driven higher by fuel prices, seeking more efficient, petroleum-saving ways to manufacture their products.
One other dampening effect for the rise in petroleum demand over the coming years comes from companies like GE Power. GE is staking a major part of its future growth rate on developing ways for its customers to save energy (and reduce emissions). GE CEO Jeffrey Immelt has an editorial in today’s Financial Times ($) on just this subject, in which he remarks:
. . . Since the 1990s, innovations in dramatically cleaner energy have emerged, not just in the US and Europe but in China, India and elsewhere. Their common denominator has been a target of higher efficiency, lower cost and fewer emissions - such as that found in cleaner coal applications that could shave millions of tonnes of carbon dioxide from emissions levels. . .
General Electric is putting its money where its mouth is. We have committed to doubling annual investment in clean energy technology research and development to Euros 1.25bn. Instead of a top-down approach that could potentially stifle creativity and innovation, we are investing most new funding at the research level, making sure that these new funds go directly into those innovation engines that offer the most promise. We also plan to double energy-efficient product revenues over the next five years and will make big cuts in our greenhouse gas emissions. If GE were to continue to grow as we project, by 2012 our emissions would have gone up more than 40 per cent. Instead, we are committing to reduce them by 1 per cent. . . .
Around the world, billions of both public and private research dollars are aimed at not only reducing energy consumption but developing “greener” sources of energy. As these efforts bear fruit and make their way to the market, the rate of growth in petroleum consumption face further headwinds.
By the way, I find Hamilton’s economic commentary very interesting, by the way, and his blog is a favorite of mine.
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