Saturday, March 22, 2008

GDP Growth and Missing Energy

Reacting to my observation on the negative correlation between Oil Imports and GDP per capita, commenter UPn Student suggested that:
"you should chart out BTU-consumption versus GDP, not oil-importation versus GDP."
I think that suggestion made sense so i did some research. I divided the Final Energy Consumption* figures in my preceding post by the applicable population for a given year and mapped the result to GDP per capita** as follows:

Figure 1: GDP per capita and Energy Consumption per Capita
Click on image to enlarge

I then computed the correlation coefficients between per capita GDP and Energy Consumption during the three periods of expansion under Cory, FVR and GMA as well as the two periods of contraction that are sandwiched in between as shown in the diagram below.

Figure 2: Correlation Coefficients: GDP per Capita and Energy Consumption per Capita
Click on image to enlarge

For the periods of GDP expansion (1986 to 1989, 1993 to 1997 and 2002 to 2005), the above show similar patterns of correlation between per capita GDP and Energy Consumption as my previous computation which was based on Oil Imports. (As can be seen, for the three periods of expansion, the values of the correlation coefficients are practically identical.)

The first two post-EDSA expansions under Cory and FVR shows the expected positive correlation between per capita GDP and per capita Energy Consumption. By contrast, the current expansion under Gloria Arroyo shows a negative correlation. Even after factoring in the contributions of Malampaya's Natural Gas starting in 2002, the strangeness remains.

The next step would be to identify the 'missing' component and match that to the sector of the economy that seems to be consuming less energy than it normally does. Among the three components of Final Energy Consumption for the period 2002 to 2005, both Coal and Electricity has shown a positive correlation. In contrast, Petroleum has shown an almost perfect negative correlation:

Energy SourceCorrelation Coefficient
Petroleum- 0.99
Table 1: Correlation Coefficients: GDP per Capita and Energy Consumption by Source (2002 to 2005)

So the missing energy turns out to still be Petroleum (which is derived from Crude Oil).

Which sector of the economy then has been consuming less and less Petroleum per capita as per capita GDP increases? Of the three broad categories of power consuming sectors of the Philippine Economy, i.e. Industry***, Transport**** and Others***** (which includes the Residential and Commercial Sectors), all have shown negative correlations when it comes to Petroleum consumption and GDP per Capita:

Economic SectorCorrelation Coefficient
Industry- 0.84
Transport- 0.88
Others- 1.00
Table 2: Correlation Coefficients: GDP per Capita and Petroleum Consumption by Economic Sector (2002 to 2005)

It may again be argued that Petroleum is not the only source of energy of the above sectors so we need to consider the possibility of substitution of Petroleum by other sources (e.g. Electricity and Coal). If we take into account all those other sources of energy (i.e. Electricity and Coal) used by these sectors into the computation of the Correlation Coefficient, we get the following results:

Economic SectorCorrelation Coefficient
Industry + 0.83
Transport- 0.88
Others- 0.62
Table 3: Correlation Coefficients: GDP per Capita and Energy Consumption by Economic Sector (2002 to 2005)

The above shows that for the Industry Sector, substitution of Petroleum by other sources may offer a plausible explanation for the reduction in its usage. However, for the remaining sectors such as Transport and Others (includes Commercial and Residential), the question of missing energy is still unresolved. The alternative explanations i can think of are the following:
  1. We have become more efficient in consuming energy to the extent that energy consumed per person is actually decreasing even as incomes are increasing. This, however, is highly unlikely as it goes against the pattern of increasing energy consumption that goes with increasing incomes.
  2. Energy consumption is being understated. It may be that the smuggled oil is not being accounted for in the Energy Balance Tables.
  3. GDP growth has been overstated and corresponding per capita GDP has not really increased as much as has been reported. This is more consistent with the results of the 2003 to 2006 Family Income and Expenditure Survey (FIES).
I would welcome inputs and alternative explanations from the readers.

Update 7:00pm: In the comments section, Gabby asks how i determined whether a given sector substitutes between energy sources. For each sector, i computed the correlation coefficient using Petroleum Consumption (in the green cells) and did the same with Total Energy Consumption (in the yellow cells) as follows:

YearIndustry Sector
Correlation Coefficient-0.84+0.83
Table 4: Final Energy Consumption (in ktoe)
Industry Sector (2002 to 2005)

As seen above, with Petroleum alone, the Correlation Coefficient was negative (at -0.84) but if we include other energy sources i.e. Coal and Electricity, the value turns positive (at +0.83). This means that the increase in the alternative Energy Sources more than compensated for the relative decrease in Petroleum. The same cannot be seen for the rest of the sectors as shown in the following tables where the coefficients have remained in negative territory:

YearTransport Sector
Correlation Coefficient-0.88-0.88
Table 5: Final Energy Consumption (in ktoe)
Transport Sector (2002 to 2005)

YearOthers Sector
Correlation Coefficient-1.00-0.62
Table 6: Final Energy Consumption (in ktoe)
Others Sector (2002 to 2005)

Update Nov-16-2008: Economist-blogger Tyler Cowen of Marginalrevolution, takes a similar over-all approach to the above and applies it to China. He speculates that the year-on-year change in generated electrical power in China for the month of October may be a more reliable indicator than government-reported GDP statistics.

Update Jan-27-2009: In response to GabbyD's query in the comments section, here is the relative share of the Transportation Sector to total GDP (1990 to 2008).

YearTransportation & Communications Sector GDPTotal GDPRelative Share
Table 7:Relative Share of Transportation & Communications Sector to GDP (1990 to 2008)******

*Source: APEC Energy Database
**Source: NSCB for 1994 to 2006 and Virtual Philippines, Biz Pack, Statistics - GDP and Economic Indicators for 1986 to 1993.
***Industry Sector includes Iron and Steel, Chemical (incl. Petro-Chemical), Non Ferrous Metals, Non Metallic Mineral Products, Transportation Equipment, Machinery, Mining and Quarrying, Food, Beverages and Tobacco, Pulp, Paper and Printing, Wood and Wood Products, Construction, Textiles and Leather.
****Transport Sector includes International Civil Aviation, Domestic Air Transport, Road, Rail, Inland Waterways, Pipeline Transport.
*****Others Sector includes Commerce and Public Services, Residential, Agriculture and Fishing.
******Source: NEDA


Gabby said...

hey good work! got a question, when you wrote:

"t may again be argued that Petroleum is not the only source of energy of the above sectors so we need to consider the possibility of substitution of Petroleum by other sources (e.g. Electricity and Coal). If we take into account all those other sources of energy (i.e. Electricity and Coal) used by these sectors into the computation of the Correlation Coefficient, we get the following results:"

how do u know how a sector substitutes between energy sources? how do you know the magnitude of the substitution? what is your technique?

moreover, what is the interpretation of the positive number? it is the correlation coefficient of GDP per capita and that sector's Petroleum consumption? But if there is substitution, then shouldn't it be negative (i.e. as GDP per cap rises, petroleum consumption falls as the sector uses more of the alternative sources)?

again, thanks, this is a very interesting question!

cvj said...

Hi Gabby, thanks! I have posted the raw data that i used to compute the coefficients and explained my method of arriving at whether other energy sources substituted for petroleum.

If the correlation turns from a negative to a positive number as in the case of the Industry Sector, then i conclude that the alternative energy sources substituted for the relative decrease in Petroleum. If the correlation coefficient remains negative, then i conclude that the alternative energy sources were unable to compensate for the decrease in Petroleum.

Tongue's Wrath said...

Great piece of work, Chuck.

You went to all this trouble just to prove to some dumbwits projecting themselves as bigtime financial gurus in some blog, the sloppy figure-tweaking this government's ANAL-leasts, er, analysts have been feeding The Great Economist for her praise releases and speeches.

I couldn't have done it as clearly as you did, but it saves us pundits of all the effort that would have been needed in explaining how smuggling and data sugarcoating cannot be hidden even by the most careful fabricators.

Peter Wallace, if he's reading this, I'm sure would sum it all up in a one-word interrogative: "See?"

Just great, Chuck. Just great.

cvj said...

Thanks Tongue, coming from you it's much appreciated! I also did some comparisons with other APEC-member countries and will update this post when i get the time. Suffice it to say, our profile is much more like that of Hongkong which is odd because we seem to be behaving like a 'rich-country' economy.

Tongue's Wrath said...

You forgot to mention even substitution by coal is much overstated since Napocor bought its stocks at ridiculuous prices.

But looking at energy figures, I'm awed by the prevailing estimated costs of new power projects. While it is global rule-of-thumb to price new power plants at $1M per Megawatt, the sole non-conformist, it seems, is the Philippines whose costs are between $1.6M - $3M per MW!

To top it all, bidders are willing to pay that amount for our OLD Napocor plants!

Tell me, what's included in the package?

cvj said...

Tongue, thanks for pointing that out. I could not incorporate any over(or under)-pricing since the energy statistics are expressed in terms of kilotons of oil equivalent (ktoe).

In any case, if you can point me to links for the coal and power plant overprice, i'd be interested in that information as well especially since high domestic energy prices has been identified (by the ADB) as a major critical constraint to our economic growth.

Karl M. Garcia said...

Energy consumption is being understated. It may be that the smuggled oil is not being accounted for in the Energy Balance Tables.

smuggled oil does not change the number of litters you buy for your car.
smuggled oil does not change the number of kwh you spend in consuming electricity.

I have no problem with smuggled oil can distort our GDP,but I won't consider it a factor on energy consumption.

Karl M. Garcia said...

I went back to mlq3's blog and he pointed out what is happening ( to be fair the developments that he is talking about is way after this blogpost.
With the benefit of hindsight we can see that there are indeed factors to consider like breaking down of powerplants(ex Ilo-Ilo) due to lack of preventive maintenance to improve the performance of a powerplant by improving the heat transfer process in coal plants. It was presented in the power summit by one of the people my dad is consulting.

and it is true that aboitiz and san miguel is now agressive in the power sector.

about the coal contracts.
I know by this time alam mo na.(just in case hindi pa)

link 1

cvj said...

Karl @2:12pm, excellent point!

cvj said...

Concerning Manolo's point on the Oligarchs' trying to corner the energy market, i made the distinction between absolute energy demand which is increasing and per capita energy demand which has been decreasing (at least for the 2005 to 2007 period). The increase in absolute energy demand will continue simply because of our population growth so there is still money to be made in the revenue sector especially if you have friends in government.

However, if it is true that our per capita gdp is increasing, why has not our per capita power consumption been also increasing and in fact has decreased?

Karl M. Garcia said...

Thanks Chuck!

me comment ako dun ke mlq3 tungkol sa commnet mo.

walang personalan,comment lang.

that's all for this topic.

cvj said...

BTW, thanks for the links on the Napocor coal supply contracts. I was not aware of this issue.

GabbyD said...

thanks! another question (this is one year late!)

so you detect substitution by looking at the changes in correlation of the energy sources by sector to GDP over time. ex, in industry, the correlation is positive for total energy, negative for petrol, then there is subsitution into other forms of energy.

you can also look at in terms of shares, if you wish. if petroleum share in industry is falling as the total is rising, the others must be growing.

in tables 4 thru6, is this correlation is the correlation of energy (petrol or total) consumption to GDP?

did the output/production of transportation and 'others' grow as well as a share of GDP?

this is the missing piece. if their output shrank relative to overall GDP (smaller share in GDP) then their relative energy consumption doesn't rise as much, or even falls. then it makes sense that total petroleum consumption/imports falls.

this is particularly important for transpo. from your data, total energy consumption is roughly 1/2 accounted for by this sector (the balance shared by the others).

if transpo shrank as a proportion to GDP, then total energy consumption falls, petrol consumption falls too.

cvj said...

Hi Gabby, tables 4 to 6 are the correlation of Energy Consumption, measured in Kilotons of Oil Equivalent (KTOe), to per capita GDP.

I checked the NEDA figures (which i've posted as 'Table 7' in the main blog entry), and it seems that the share of Transportation relative to Total GDP has grown over time, including the period of 2002 to 2005. Unfortunately, the NEDA classification lumps Communications along with Transportation, but we can further cross check the growth of Transportation via the number of Motor Vehicles registered over the same period. A quick look at the number of motor vehicles registered indicates that the Transportation sector has been growing from 4.2 Million in 2002 to 5 Million in 2005.

cvj said...

Here's the correct link.