Chapter Nine
Flattener #6 – Globalization, Industrialization, and Urbanization
Arguing against globalization is like arguing against the laws of gravity.
Kofi Annan
I remember my first trip to China as if it was yesterday. I was in my early twenties, living and working in London at the time, and starting to travel for business on a regular basis. It was easy to fall into the routine of the flight, work a bit, watch a movie, have a glass of wine, and sleep as much as possible, but this trip was special. I remember thinking to myself “in 10 hours I will be the first member in my family to ever set foot in China”. I had a sense of pride and responsibility, and kept thinking about my parents, their parents, and their parents' parents, and how proud they were that I was able to see parts of the world that they would probably never see with their own eyes.
Ten hours on a plane can be a long time, but for me, that day, it was not enough. As we cruised, I kept reminding myself that the same journey would have taken me ten days by train and several weeks by boat. I thought of Marco Polo, on his horse, and about his trips to China in the thirteenth century. The adventure of visiting remote cultures, the extraordinary physical effort subject to the inclemency of the weather, and the dangers of the unknown. But there I was, comfortably sitting on a warm plane, watching the freezing Russian steppes underneath, just a few hours away from Beijing's airport where a car would be waiting to take me to a luxury hotel downtown. It was easy to lose perspective of how air transportation had “shrunk” the world. In my firm, flying in the “red eye” overnight flight from London to Beijing, New York, or Johannesburg, and back the night after was pretty common. That's globalization for you.
But this time I forced myself to make it different. I wanted to make sure I kept the perspective of what was happening. I spent a good part of the trip reading about China and peeping through the window, mesmerized by the vastness of the plains and mountain chains as we flew across Eastern Europe, Russia, Kazakhstan, Mongolia, and finally China. The “world is almost empty” I remember thinking to myself. With the exception of a few scattered cities along the way, the landscape was largely bare. “Who knows how much oil, gas, and coal is waiting for us below those fields”, I thought. The world just felt small as we spent our lives going from crowded “point A” to crowded “point B” without the full appreciation of the dimensions, but the world was not that small nor full after all.
So, there I was, caught between the perspective of a small and crowded world and the perspective of a large and empty world, thanks to air travel and globalization.
And then we landed. I was in China. Finally. But the excitement quickly gave way to the crude reality. The strong smell and pollution hit me first. Then, the thousands and thousands of bicycles, buses and cars stuck in endless heavy traffic as far as my eyes could see in all directions. Not the idyllic postcard I was hoping to describe to my grandfather over the phone.
The empty world I saw from the plane seemed very distant now. Beijing had about 15 million inhabitants by then, and reached 21 million by 2014 according to UN data.1
In March 2014, the Chinese government announced its intention move 100 million2 people from the rural areas to cities within the next seven years. Currently, about 54% of China lives in cities, compared with 80% in developed countries and roughly 60% in other developing countries with similar per capita income levels as China. The “National New-type Urbanization Plan” aims to bring China closer to 60% by 20203 through the massive build-out of transport networks, urban infrastructure, and residential real estate under the government promise of make China's urbanization more “human-centred and environmentally friendly”.
These trends of globalization, industrialization, and urbanization point towards ever-increasing demand from China, and supply is expected and set to respond to the expectations of demand growth. But there is room for disappointment.
Testing the hypothesis of “Ever-Increasing” demand
There seems to be an unconscious bias in our brains that points towards “ever-increasing population”, “ever-increasing energy demand”, and “ever-increasing pollution”, with fatalistic conclusions to the world. None of which is necessarily true.
Let's start with the main demographic trends.
Demographic trend #1. The global population is growing, but at a slower pace
According to the United Nations, by 1900, the world population was around 1.7 billion people. Before then, population growth had been slow. The age structure of the population was broadly constant, and very few people lived beyond age 65.4
During the first half of the twentieth century, rising life expectancy boosted population growth. By 1950, the population of the world was 2.56 billion.5 But during the second half of the twentieth century fertility rates declined dramatically, by almost one-half, causing population growth to slow down and the share of the elderly to increase.
By 2013, the world population had surpassed 7 billion people, and is expected to grow towards 9 billion by 2050 and towards 11 billion by 2100.6 These are just predictions, they do show that the population is growing but at a slower rate of growth, from current 1.25% pa towards 0.25% pa.
Furthermore, over the next 50 years, the population of some countries/regions is expected to decline by as much as 30% in Central and Eastern Europe, 22% in Italy, and 14% in Japan.
On average, the world population is therefore expected to continue to grow, but at a slower pace.
Demographic trend #2. The age structure is changing
Another major development in global demographics is that the age structure, the “population pyramid”, is changing.
On average, the global population is getting older. The share of elderly people is increasing, although this changes markedly across different regions.
This trend is important as it is expected to pose challenges to the global economy in the form of slower economic growth, and difficulties in funding pension and health care systems.
And it also poses the question of how it will impact energy consumption as different age groups and regions have obvious different consumption patterns.
Population growth vs. economic growth vs. energy demand growth
Economic growth is closely related to demographics, but the relationship between the rates of population growth and economic growth has been the subject of debate for centuries.
In 1798, Thomas Malthus, in his Essay on the Principle of Population, argued that “the rate of population growth was held in equilibrium by the pace of economic growth.”7 Yet, today's dynamics seem to be the exact reverse. As economic prosperity has risen around the world, fertility rates have fallen, life expectancy has increased, resulting in slower population growth and aging.
Beyond past trends, the key question becomes “how energy intensive will economic growth be in the future?” The recent trends indicate that, on average, economic growth is becoming less energy intensive. Although, yet again, the energy intensity shows significant divergences across regions, as developing economies are more energy and commodity intensive than the developed world.
As the developed markets become less energy intensive, their share of global demand will continue to decrease. For example, as of today, North Americans are just 5% of the world's population but consume 24% of the world's energy.8 Clearly unsustainable.
In terms of economic growth, the International Monetary Fund (IMF) estimates the world's real GDP will rise by an average of 411% (that is, 3.6% pa) from 2010 to 2040, with a polarized regional pattern, with 4.7% pa outside the OECD, and 2.1% within the OECD.9
In terms of energy demand growth, the IEA estimates that world energy consumption will grow by 56% (that is 1.1% pa) between the same period 2010 and 2040, also with a polarized regional pattern, with 90% growth outside of the OECD and 17% increase within the OECD. By 2040, China's energy consumption will be twice the United States and four times that of India.10
At this stage it is important to differentiate the source of energy demand. And we tend to differentiate between two major categories. On the one hand, power generation and industrial demand. And on the other hand, transportation demand. These sectors are today very fragmented, but will become more equalized and interrelated in a flatter energy world. We will discuss these very important trends extensively throughout this chapter and the rest of the book.
Comparing the estimates from the UN for population growth, the IMF for economic growth, and the IEA for demand growth, it seems as if a global population growth of 0.7% pa may be able to generate economic growth in real GDP terms of 3.6% pa, while increasing energy consumption by 1.5% pa.11
These trends are consistent with the work from Laherrere, who claims that world oil consumption and production per capita peaked in 1979.12
The “Diplomatic” demand clause
As discussed, official demand estimates tend to be “diplomatic”.
For example, the IEA demand forecasts are based on GDP estimates of the countries themselves, which tend to have a bias towards being “too optimistic” in their economic growth. Which country would “shoot itself” in the foot with overly negative outlooks that may impact consumption and investment?
Anyone involved in forecasting knows how difficult it is to predict so far in the future. The longer term the prediction, the greater the room for error. Small changes in key variables can have a compounding effect. Predicting global population growth, economic activity, and energy consumption is an extremely difficult challenge, and very sensitive to key variables such as fertility and mortality.
Forecasts are necessary, but we need to be realistic about their limitations. That's why I am not looking to forecast future prices, but rather focus on the forces at play, the likely direction of the impact, and the interrelationship between them through “virtuous”, “vicious”, and “mean reverting” processes.