Energy-Economics Models

Dave Summers at Bit Tooth Energy comments on ExxonMobile's new Outlook for Energy publication (PDF). I particularly like his last paragraph:

If I can put it another way. At the beginning of the report, after projecting a reasonable estimate of global growth over the next 25 years, EM put in a very optimistic level of improvement in energy efficiency in order to significantly lower energy demand. Then, to balance supply to that lower level of demand, they seem to have picked the most optimistic of assumptions about potential growths in that supply. I rather suspect that they are seeing the writing on the wall, but obfuscating it with optimism beyond the bounds of realistic expectation.

I want to write briefly today about dividing various energy-and-economics forecasting models into two camps.  The ExxonMobile model falls into the first camp, as do the models used by the EIA and the IEA.  The basic structure of these models is to: (1) assume a global economic growth rate (2.8% per year in ExxonMobile's case); (2) calculate the amount of energy required to support that growth; and (3) allocate the necessary energy production across various sources.  As Dave points out, one of the sources ExxonMobile has depended on heavily in this year's forecast is energy efficiency.  Despite those improvements, the 2040 forecast when compared to 2010 figures calls for a 30% increase in global liquid fuel consumption and an 85% increase in global electricity consumption.  Models in this camp are optimistic: they predict continued rapid global economic growth for the duration of the time frame they examine.

Call the second camp the Limits to Growth models, as that one is probably the best known.  These models work in the reverse direction from those in the first camp: (1) estimate the resources that are available; (2) estimate how effectively those resources can be used; and (3) calculate the economic growth (either positive or negative) that results.  Other models in this group include those done by Robert Ayres and Benjamin Warr.  In the Ayres-Warr models, the critical resource is high-quality energy.  The models in this camp are quite pessimistic about the future: pretty much all of them predict a global economic collapse of some sort within a few decades (some sooner than others) as population outgrows a shrinking resource base.

Given the drastic differences in the predictions, it seems reasonable to ask how well the two camps have done at forecasting the future.  The figure to the left [1] compares the standard run of the model published in Limits to Growth in 1972 with actual data from the 30 years following.  The pastel solid lines from 1900 to 1970 are the historical data that went into model; dotted lines are the results from the standard run; and the bold solid lines from 1970 to 2000 are estimates of how the variables actually changed over those 30 years.  The predictions have held up quite well.  Non-renewable resources have not declined as rapidly as predicted, and food-per-capita has grown somewhat faster, but the differences are still relatively small.

The models in the first camp have, IMO, not done nearly so well.  For example, it has become sort of an annual tradition in some forums to compare the IEA's forecasts to what actually happened over time (and make fun of the predictions).  For example, in the IEA's World Energy Outlook 2001, they forecast that conventional oil supplies should be adequate to meet global demand through at least 2020. They predicted that in 2010 demand would be 96 million barrels per day at a price of $21 per barrel, increasing in 2020 to 115 million barrels per day at a price of $28 per barrel.  Looking back from today, we know that conventional oil production peaked at around 75 million barrels per day around 2004.  Total liquid fuels production in 2010 (conventional oil, plus unconventional oil, plus natural gas liquids, plus biofuels including ethanol) was about 87 million barrels per day.  As I write this, the price for Brent crude is above $107 per barrel.  Oil prices below $30 per barrel appear to be gone for good (well, absent a very large global economic collapse): this past week, the oil ministers for Saudi Arabia and Kuwait said publicly that $100 per barrel is a reasonable price for oil.

So the pessimists appear to be winning.  I admit to being a pessimist, but not as much of a pessimist as the Limits to Growth group.  The reason I'm not that pessimistic is because I think looking at global numbers is not the right way to do things.  Different regions have different characteristics, with different population growth rates and different endowments of both renewable and non-renewable resources.  As limits on the availability of liquid fuels make the world a bigger place, those regional differences will matter.  Collapse in one region need not spill over into other regions.  I really need to put time into building my own model, where it's possible to look at the projected outcomes for specific regions of my own choosing.


[1] The figure is taken from the Smithsonian.com web site piece titled "Looking Back on the Limits to Growth".