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World energy markets and the developing countries
World energy markets and the developing countries Boum-Jong Choe Primary energy consumption in the developing countries has been increasing rapidly in the last ten years, giving rise to the prospect that these countries will play an even greater role in world energy markets. This paper describes the adjustments to higher petroleum prices that have taken place in the developing countries and looks at their likely future role. For the purpose of exposition, the developing countries are divided into oil-exporting and oil-importing groups. Analysis is conducted mostly at the aggregate level but fuel-specific and sectoral trends are also identified. The author notes that the experience of the last ten years suggests that the dramatic increases in international petroleum prices had a relatively minor impact on the developing countries' total energy consumption. There was, however, a significant degree of substitution for other fuels for petroleum in the oil-importing developing countries. The prognostications for the future presented in this paper are based on the assumption that adjustments to price changes take more time in the developing countries. A reasonable degree of adjustment can be expected for the years ahead. Keywords: Energy adjustment; Developing countries; Energy prospects
The developing countries are important for the world energy markets on at least two accounts. ~ First, the developing countries as a group are net exporters of energy, particularly of petroleum; in 1982, they accounted for 48% of world production and 70% of world gross exports of petroleum. Second, primary energy consumption of the developing countries has been increasing rapidly at an average annual rate of 5.9% between 1970 and 1982 Boum-Jong Choe is an Economist with the World Bank, 1818 H Street, NW, Washington, DC 20433.
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which, if continued, could play an important role in the determination of world energy prices by drastically reducing net exports from these countries. This paper describes the energy sector adjustments that have taken place in the developing countries in the wake of the petroleum price increases of the last decade and on the basis of these, looks into their future role in the world energy markets. The paper is concerned mostly with the broad aspects of adjustment to the higher-price regime, even though the diversity of the countries involved defies easy generalization. The developing countries have been divided into oil-exporting2 and oil-importing groups on the basis of the expectation that adjustment characteristics will be substantially different between these groups.
ADJUSTMENTS SINCE 1973 A notable feature of the developing countries' energy demand adjustments in the era of high petroleum prices is that their primary energy consumption continued to increase rapidly, 3 both in the oil-importing developing countries (OIDCs) and the oil-exporting developing countries (OXDCs). After increasing at more than 7% annually between 1961 and 1973, the growth rate slowed down to 5.2% between 1973 and 1982.4 There are many factors behind the rapid increases in energy consumption in the developing countries. At the aggregate level, the usual approach is to explain changes in energy demand in terms of changes in income (output) and energy prices. Table 1 shows the changes in energy intensity of gross domestic product (GDP) since 1970.5 A striking contrast between the developing countries and the OECD is that energy intensity of GDP rose substantially in the former group, while it fell steadily by a sizable margin in the latter group. The increase in the developing countries' energy
0301-4215/85/040304-06503.00 ~ 1985 Butterworth & Co (Publishers) Ltd
World energy markets and the developing countries Table 1. Indicators of energy demand adjustments for the developing countries, 1970-82. 1970
1973
1975
1978
1980
1982
Index of energy Intensity of GDP (1973=100) OIDCs 93.5 100.0 97.0 99.3 101.8 105.0 OXDCs 101.8 100.0 98.3 104.3 108.4 117.4 Total developing countries 96.1 100.0 97.4 100.8 103.8 109.0 Total OECD countries
101.7 100.0 96.2
94.9
8 8 . 3 84.2
Share of petroleum in primary energy consumption (percentage) OIDCs 58.0 6 1 . 4 58.2 58.4 5 5 . 5 52.3 OXDCs 70.7 7 0 . 4 68.6 70.4 6 8 . 7 68.9 Total developing countries 6 2 . 0 6 4 . 2 61.5 62.4 60.1 58.3 Total OECD countries
49.7
5 2 . 3 50.8
51.5
4 7 . 2 44.3
Sources: United Nations, Yearbook of World Energy Statistics 1982, data tape, United Nations, Geneva; International Energy Agency, Energy Balances of OECD Countries 1970-82, OECD, Paris; OECD, Main Economic Indicators, various issues, OECD, Paris; World Bank, National Accounts Data File, World Bank, Washington, DC.
intensity can be interpreted as a reflection of: (a) changes in the structure of output towards more energy-intensive uses; and (b) the lack of sufficient incentives - price incentives in particular - to save energy. It has been found that structural variables (such as the share of manufacturing in GDP) explain a significant part of the changes in energy intensity in developing countries. 6 For this reason, the fact that estimates of income elasticity of energy demand in the developing countries are significantly higher than unity has been attributed to structural changes. If income elasticity estimates obtained for the 1960-75 period (1.19 and 1.52 for OIDCs and OXDCs, respectively) 7 are relevant also for the 1970-82 period, it is pertinent to ask what the energy intensity in 1982 would have been if there had been no petroleum price increase. Calculations show that the energy intensity index would have been 106.4 for the OIDCs and 125.0 for the OXDCs instead of 105.0 and 117.4, respectively (see Table 1).
Consumption of energy in oil-importing countries The result for the OIDCs is surprising because it suggests that the impact of energy price increases on primary energy consumption has been at best only minor. A number of broad observations may provide some clues to the factors that accounted for the changes in the OIDCs' energy/GDP relationship. First, there is little evidence that structural changes towards higher energy intensity accelerated in the last ten years to offset the possible impact of energy price increases. The growth rate of industrial-sector GDP 8 in the OIDCs slowed down from 9.0% per annum between 1960 and 1973 to 4.3% between 1973 and 1982 (GDP growth rate slowed down from 5.4% to 3.8% between the two periods). Data on
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sectoral energy consumption for 19 OIDCs s show that industrial-sector final energy consumption increased at 4.2% per annum between 1973 and 1982, only slightly higher than the 4.1% per annum growth of total final energy consumption over the same period. 9 It was the 'other' sectors (mainly the residential, commercial and agricultural sectors) that experienced the fastest increase (5.6%) in final energy consumption during this period, while that of the transportation sector grew at only 2.9% per annum. These trends leave an unmistakable impression that the quantum increases in international petroleum prices had no major impact on total primary energy consumption in OIDCs. The majority of these countries quickly adjusted domestic petroleum prices to international levels in the wake of the international petroleum price increases. As of mid1982, their domestic petroleum product prices stood roughly at a par with the oil-importing industrial countries. ~° However, price adjustments for other forms of energy have been sluggish. For example, of 33 developing countries recently surveyed by the World Bank, only seven had electricity prices greater than, or equal to, the long-run marginal cost of supply, tt These surveys also revealed that the prices of coal and natural gas in a number of the developing countries where they are domestically produced have not been adjusted sufficiently upward to reflect their replacement costs. This pricing structure partly explains the sharp drop in the share of petroleum in the OIDCs' total primary energy consumption (Table 1) which is as large in percentage terms as that of the OECD countries for the 1973-82 period. The quick adjustment of petroleum prices probably explains the relatively slow growth of the transportation sector's final energy consumption. The availability of relatively inexpensive energy sources such as hydro or nuclear electricity, coal and natural gas enabled the industrial and 'other' sectors to continue the historical aggregate energy/output (income) relationship. At the aggregate level, the share of primary electricity in the OIDCs' primary energy consumption increased by more than 5% between 1973 and 1982, followed by coal (2.6%) and natural gas (1.2%). The share of petroleum in primary energy consumption fell by 9% over this period. This means that the growth rate of petroleum consumption was limited to 2.5% annually, most of which occurred before 1980. At the sectoral level, it was the thermal electrical power sector of the 19 OIDCs in the International Energy Agency survey that achieved the largest
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percentage decline in the share of petroleum - from 49.5% in 1973 to 37.3% in 1982. The main substitute for petroleum was coal - its share increased by 10%. This increase was by virtue of sharp increases in coal-fired power generation in only a few countries, however, such as India and the Republic of Korea. Natural gas made a major contribution to thermal electric power in Colombia, Peru, Pakistan and Thailand. Petroleum's share in the industrial sector's energy consumption declined from 46.9% to 40.8% over the 1973-82 period. The main substitute was electricity; its share increased by 4%. Practically all of the 19 OIDCs in the sample joined in this increase. Coal was the second most important substitute for petroleum, but only in a limited number of countries such as India, the Republic of Korea, Brazil and Colombia. Natural gas was an important contributor in Brazil, India and Bangladesh, although its total share failed to increase over the period. The rapid increases in energy consumption in the 'other' sectors mainly consisted of increases in electricity; its share increased from 17.6% to 23%. This allowed a relatively small decline in the share of petroleum, from 52.3% to 50.5%. Coal's share declined sharply, suggesting that coal is an inferior fuel for residential use even in developing countries. Natural gas substantially expanded its residential market share in Argentina, Chile, India, Pakistan and Bangladesh, but its share for the total of the 19 sample OIDCs increased only from 5.1% to 6.3%.
Consumption of energy in oil-exporting countries The fact that the GDP of the OXDCs is heavily influenced by their petroleum production complicates the analysis of the energy/GDP relationship. It is not surprising that primary energy consumption increased at a much faster rate than GDP (1.38 times faster between 1973 and 1982) in these countries because GDP growth was slowed down considerably by the decline in OPEC crude oil production which did not have significant direct consequences for energy consumption. The availability of low-cost energy would seem conducive to energy-intensive structural changes in these countries but adjustments up to 1982 show little evidence that the energy intensiveness of their industrial output has accelerated since 1973. The GDP of the manufacturing and construction sectors of the OXDCs grew at 7.1% between 1973 and 1982 but energy consumption of the industrial sectors in a sample of 18 OXDCs increased only at 5.4% over the same period. 12 In contrast, it was the transportation sector of the 18 OXDCs that experienced the most rapid increase in
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energy consumption (9.3% between 1973 and 1982), followed by the 'other' sector (7.8% over the same period). Sectoral differences in energy consumption growth rates are consistent with the fact that it was the non-mining and non-manufacturing sectors of the OXDCs that experienced the fastest increase in value added. Domestic pricing of petroleum products in the OXDCs, not to mention the prices of other energy products, only recently started to catch up with international levels. This explains the fact that the OXDCs have made little progress in substituting other fuels for petroleum. Petroleum's share in total primary energy consumption dropped by only 1.2% between 1973 and 1982 - a fall which was made up mainly by an increase in the share of natural gas. In addition to the distorted pricing structure, the slow adjustment was partly attributable to the lack of infrastructure. However, even in power generation, where infrastructure requirements per unit of natural gas delivered are expected to be relatively small, natural gas failed to increase its share of the market, increasing only from 32.4% to 32.8% in the 18 OXDCs over the 1973-82 period. The share of natural gas in the industrial sector declined by almost 7% over this period, while increasing in the other sectors by 4%. Coal and primary electricity have played an insignificant role in the OXDCs. In summary, it appears that the impact of the dramatic increases in international petroleum prices on total primary energy consumption has been only minor in both OIDCs and OXDCs. Until recently, efforts to improve energy efficiency through substitution of other factor inputs for energy have not gathered sufficient momentum to make a significant difference in the energy/GDP relationship. However, there are strong indications that the OIDCs achieved substantial savings in petroleum consumption through substitution of other fuels for petroleum.
Supply On the supply side, the OIDCs were more successful in increasing supplies of coal and primary electricity than petroleum and natural gas. Of the increment in primary energy supplies between 1973 and 1982, coal and primary electricity accounted for 44% and 32% respectively compared with 24% for petroleum and natural gas combined. Petroleum production in the OIDCs increased from 1.34 million barrels per day (bbl/day) in 1973 to 1.91 million bbl/day in 1982; the increase occurred mostly in the 1978-82 period and in the countries that were already established producers. 13 The ENERGY POLICY August 1985
World energy markets and the developing countries
countries that had large increases were India, Peru, Argentina, Brazil and Burma. Proven reserves for petroleum in the OIDCs increased from 6.7 billion barrels at the end of 1975 to 9.8 billion barrels as of the end of 1984, largely through sizable reserve additions in established producers, particularly India and Brazil. 14 The number of wells completed in the OIDCs increased 2.5 times between 1973 and 1980, roughly the same rate as that of the total number of wells completed in the market-economy countries but they represented only a small proportion (3%) of the total. Exploratory (wildcat) wells drilled did not increase as fast as the total number of wells completed, ~5 implying that the response time for exploration decisions is longer than that for development and extension drilling. Although total petroleum production in the OXDCs declined between 1973 and 1982, there was a disparity between the OPEC and the non-OPEC countries in this group; OPEC production declined by 36%, while that of non-OPEC oil exporters increased by 293%. The level of exploratory and development activity in the OXDCs has not picked up as vigorously as in the OIDCs. However, reserve discoveries and production increases in the nonOPEC oil-exporting developing countries have been phenomenal; proven reserves of this group currently stand at 64.5 billion barrels compared with 32.6 billion in late 1975, largely due to discoveries in Mexico. Developing country coal producers 16 have significantly stepped up production of coal since 1973, contributing to the restraint in the growth of petroleum demand. A few of these countries Republic of Korea, Spain, Turkey and the Philippines - have chosen to increase imports of coal. However, for the majority of the developing countries, coal has not emerged as a viable option. A large number of developing countries benefitted from increased supplies of primary electricity, most of them by increasing supplies of hydroelectric power and for a few, by increasing nuclear electricity generation. Efforts to increase domestic supplies of energy have helped to limit the increase in the OIDCs' net petroleum imports to 18% between 1973 and 1982, during a period when primary energy consumption increased by 470/0.17 Although this represents a significant departure from the pre-1973 trends, the adjustment performance certainly has been less than seems optimal given the changes in energy prices. The adjustment record has been particularly poor in a number of small developing countries which
ENERGY POLICY August 1985
neither had viable supply options (or failed to exploit available supply potential) nor made serious efforts to improve energy efficiency. Some countries registered substantial reductions in energy consumption only at the cost of a devastating performance of their economies.
PROSPECTS TO 1995
Before looking to the future, it is useful to look again at why the developing countries failed to achieve significant energy savings over the past decade. The reasons are complex and diverse, but the following factors may have general relevance: • • • •
Low domestic energy prices and lack of nonprice incentives. Scarcity and high cost of capital, limiting its use as a substitute for energy. Lack of technology and management to capitalize on energy saving potential. Lack of sufficient economies of scale to justify the necessary infrastructure investment.
Are these conditions, or any other factors that inhibited adjustment in the last ten years, likely to change so as to significantly alter the past trend in energy demand? The answer to this question can only be speculative. It depends, among other things, on the state of the international economic environment and how it affects the provision of capital and technology needed by the developing countries. The purpose of the projections here is to indicate the broad trends in the developing countries' energy balances under the following assumptions:IS •
•
OIDCs will raise energy prices to the level of opportunity costs and OXDCs will raise prices to 30-50% of the level of opportunity costs. Income elasticities for energy will range between 1.1 to 1.4 and price elasticities between -0.3 to -0.5, depending on the sector and the region.
It is further assumed that the energy demand adjustments the developing countries failed to achieve in the last ten years represent adjustment lags and these adjustments will be realized within the next ten years. This may be considered an optimistic assumption and its realization probably will depend on strong action in terms of the developing countries' policies and priorities. 19 Projections of petroleum and natural gas supplies are based on a country-by-country assessment of
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their supply capability from known and prospective reserves and their relationship with international market conditions in the case of the OXDCs. Supplies of primary electricity are projected on the basis of investment projects already in the pipeline. Coal supplies are determined by competitive supply and demand equilibrium. Table 2 presents the energy balance projections for the developing countries; assumptions about GDP growth and the price of OPEC crude oil are noted at the bottom. The OIDCs are projected to increase their primary energy consumption at a rate slightly lower than that of GDP growth. This implies a decline in the energy intensity of GDP, primarily through the delayed impact of the past energy price increases on energy demand. The share of petroleum in OIDC primary energy consumption is projected to decline by 10% between 1982 and 1995. Energy intensity of GDP in the OXDCs is expected to continue to rise, although only slightly, despite partial rationalization of their domestic price structure. This is because these countries have comparative advantage in energy-intensive industries and, unlike the past ten years, are expected to exploit this opportunity more fully. Energy demand increases, however, will be met increasingly by natural gas that has a lower opportunity cost than petroleum. By 1995 the developing countries are expected to become a more important group in the world energy markets than they are now; their share of global
Table 2. Projections of developing countries' energy balances, 1982-95. 1983 1990 1995 (million bbl/day of oil equivalent) OIDCs Primary energy demand Petroleum Coal Primary electricity
Growth rates 1982-95 (percentage)
13.5 7.1 3.7 2.0
18.2 8.2 5.1 3.6
23.0 9.6 6.0 5.4
4.2 2.3 3.8 7.9
Primary energy supply Petroleum
8.3 1.9
13.3 2.8
17.0 3.1
5.7 3.8
OXDCs Primary energy demand Petroleum Natural gas
7.7 5.3 1.9
11.2 7.0 3.3
14.6 8.5 4.7
5.0 3.7 7.2
28.1 25.1
34.9 29.2
43.4 35.1
3.4 2.6
Primary energy supply Petroleum
Memo items: Assumptions GDP growth rates (percentage) OIDCs OXDCs OPEC oil price (1983 US$/barrel)
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1983 29.1
1982-90 4.2 4.4 1985 25.9
1990 27.5
1990-95 5.0 5.2 1995 36.1
primary energy consumption is expected to increase from 16% in 1982 to 21% in 1995 and primary energy production, from 27% to 33%. As the import demand for petroleum in the oil-importing industrial countries recovers in the years ahead, production and exports of petroleum of the OXDCs are expected to follow a rising trend, particularly in the 1990s. By 1995, the demand for OPEC oil is projected to be around 28 million bbl/day. The OIDCs are expected to contain the growth of net petroleum imports to within 25% above their 1982 level. To do so requires more vigorous conservation and exploration and production of petroleum than in the last ten years.
CONCLUSIONS The developing countries' primary energy consumption has been increasing rapidly since 1973. The impact on total primary energy demand of the dramatic increases in international petroleum prices has been up until now only minor. The OIDCs were successful in substituting other fuels for petroleum but the OXDCs as a whole failed to increase the share of natural gas in relation to petroleum even in the thermal electric power market where substitution is deemed relatively easy. The developing countries face more difficulties than the industrial countries in adjusting to higher energy prices. However, there is a need for much stronger action in energy-related policies. On the basis that stronger action will be taken - in particular that domestic energy prices will be adjusted to their opportunity costs - it is projected that there will be a reduction in energy intensity in OIDCs and a sharp decline in the share of petroleum in total energy demand. By 1995 the developing countries will be a more important force in world energy markets both in terms of consumption and production.
The World Bank does not accept responsibility for the views expressed herein which are those of the author and should not be attributed to the World Bank or its affiliated organizations. The findings, interpretations and conclusions are the results of research supported by the Bank but they do not necessarily represent official policy. The designations employed and the presentation of material in this paper are solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, city, area or of its authorities or concerning the delimitation of its boundaries or national affiliation. 1The developing countries here include only the market-economy
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World energy markets and the developing countries"
developing countries. Excluded are the centrally planned economies in Asia (including the People's Republic of China and others), Europe (except Yugoslavia) and Cuba. Among the member countries of the Organization for Economic Cooperation and Development (OECD), Greece, Portugal, Spain and Turkey are treated as developing countries. All members of the Organization of Petroleum Exporting Countries (OPEC) are included. 2The oU-exporting developing countries include the member countries of OPEC and the following non-OPEC oil exporters: Angola, Bahrain, Bolivia, Brunei, Congo, Egypt, Malaysia, Mexico, Oman, Syria, Trinidad and Tobago, Tunisia and Zaire. All other developing countries are treated as the oil-importing developing countries. 3This paper deals only with primary 'commercial' energy. Due to the paucity of data, the traditional fuels (such as wood and biomass) are not considered despite their importance in developing countries. Primary energy consumption is defined to include aviation and maritime bunkers and the 'unallocated' category, according to the UN statistical office. Primary electricity is converted into oil equivalent of primary energy in terms of fossil fuel requirement per unit of electricity in conventional thermal power plants. 4The growth rate substantially decelerated during 1980-82 to 3.8%, after increasing at 5.7% during 1973-80. The growth rates for the OIDCs and the OXDCs were 4.3% and 7.0%, respectively, for the 1973-82 period. In contrast, primary energy consumption in the OECD countries remained virtually unchanged. 5Energy intensity of GDP, taken as the measure of aggregate income (output), is the amount of total primary energy consumption per unit of GDP. GDP of individual countries is measured at the constant prices of a base year (1980 for the developing countries and 1975 for the OECD countries) and aggregated at the constant exchange rates of the base year. 6Although it is well recognized that structural changes in the developing countries have had a major impact on their energy consumption, measurement of this impact has been elusive primarily because of the lack of adequate data. See, for example, L. Hoffmann, 'Energy demand in developing countries: approaches to estimation and projection', Workshop on Energy
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Data of Developing Countries, Vol 1, International Energy Agency (lEA), Paris, 1977. ZB.J. Choe, 'Energy demand in developing countries', in J. Dunkerley, ed, International Energy Strategies, Oelgeschlager, Gunn and Hains, Cambridge, MA, 1980. 8Combined GDP of mining, manufacturing and construction sectors. 9International Energy Agency, Energy Balances of Developing Countries, 1971/82, lEA, Paris, 1984. The 19 countries covered 65% of the OIDCs' primary energy consumption in 1982. 1°There were a few exceptions in that some countries subsidized some products such as automotive diesel oil and kerosine. l~World Bank, The Energy Transition in Developing Countries, World Bank, Washington, DC, 1983, p 16. 12International Energy Agency, Energy Balances of Developing Countries, 1971/82, lEA, Paris, 1984. The 18 countries accounted for 73% of the OXDCs' primary energy consumption in 1982. ~3The OIDCs that discovered petroleum and became petroleum producers in recent years are Benin, Cameroon, Ghana, Ivory Coast, Guatemala, Surinam and the Philippines. Their total production in 1984 was 0.17 million bbl/day, of which 0.12 million bbl/day belonged to Cameroon. 140il and Gas Journal, various issues. 1SWorld Bank, up cit, Ref 11, p 27. ~61ndia, the Republic of Korea, Spain, Turkey, Yugoslavia, Colombia, Thailand, Pakistan, Brazil, Mexico, South Africa and Morocco. l ZDuring the same period, the OECD countries reduced their net petroleum imports by 32%, through reduction of energy intensity of output and fuel substitution. 18More details of the projection methodology and assumptions can be found in B.J. Choe, A Model of World Energy Markets and OPEC Pricing, World Bank Staff Working Paper No 633, World Bank, Washington, DC, 1984. ~gTo date, only a few OIDCs have taken steps to seriously address their energy issues. For a survey, see Energy Issues and Options in Thirty Developing Countries, report of the Joint UNDP/World Bank Energy Sector Assessment Program, August 1984.
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The developing countries are important for the world energy markets on at least two accounts. ~ First, the developing countries as a group are net exporters of energy, particularly of petroleum; in 1982, they accounted for 48% of world production and 70% of world gross exports of petroleum. Second, primary energy consumption of the developing countries has been increasing rapidly at an average annual rate of 5.9% between 1970 and 1982 Boum-Jong Choe is an Economist with the World Bank, 1818 H Street, NW, Washington, DC 20433.
304
which, if continued, could play an important role in the determination of world energy prices by drastically reducing net exports from these countries. This paper describes the energy sector adjustments that have taken place in the developing countries in the wake of the petroleum price increases of the last decade and on the basis of these, looks into their future role in the world energy markets. The paper is concerned mostly with the broad aspects of adjustment to the higher-price regime, even though the diversity of the countries involved defies easy generalization. The developing countries have been divided into oil-exporting2 and oil-importing groups on the basis of the expectation that adjustment characteristics will be substantially different between these groups.
ADJUSTMENTS SINCE 1973 A notable feature of the developing countries' energy demand adjustments in the era of high petroleum prices is that their primary energy consumption continued to increase rapidly, 3 both in the oil-importing developing countries (OIDCs) and the oil-exporting developing countries (OXDCs). After increasing at more than 7% annually between 1961 and 1973, the growth rate slowed down to 5.2% between 1973 and 1982.4 There are many factors behind the rapid increases in energy consumption in the developing countries. At the aggregate level, the usual approach is to explain changes in energy demand in terms of changes in income (output) and energy prices. Table 1 shows the changes in energy intensity of gross domestic product (GDP) since 1970.5 A striking contrast between the developing countries and the OECD is that energy intensity of GDP rose substantially in the former group, while it fell steadily by a sizable margin in the latter group. The increase in the developing countries' energy
0301-4215/85/040304-06503.00 ~ 1985 Butterworth & Co (Publishers) Ltd
World energy markets and the developing countries Table 1. Indicators of energy demand adjustments for the developing countries, 1970-82. 1970
1973
1975
1978
1980
1982
Index of energy Intensity of GDP (1973=100) OIDCs 93.5 100.0 97.0 99.3 101.8 105.0 OXDCs 101.8 100.0 98.3 104.3 108.4 117.4 Total developing countries 96.1 100.0 97.4 100.8 103.8 109.0 Total OECD countries
101.7 100.0 96.2
94.9
8 8 . 3 84.2
Share of petroleum in primary energy consumption (percentage) OIDCs 58.0 6 1 . 4 58.2 58.4 5 5 . 5 52.3 OXDCs 70.7 7 0 . 4 68.6 70.4 6 8 . 7 68.9 Total developing countries 6 2 . 0 6 4 . 2 61.5 62.4 60.1 58.3 Total OECD countries
49.7
5 2 . 3 50.8
51.5
4 7 . 2 44.3
Sources: United Nations, Yearbook of World Energy Statistics 1982, data tape, United Nations, Geneva; International Energy Agency, Energy Balances of OECD Countries 1970-82, OECD, Paris; OECD, Main Economic Indicators, various issues, OECD, Paris; World Bank, National Accounts Data File, World Bank, Washington, DC.
intensity can be interpreted as a reflection of: (a) changes in the structure of output towards more energy-intensive uses; and (b) the lack of sufficient incentives - price incentives in particular - to save energy. It has been found that structural variables (such as the share of manufacturing in GDP) explain a significant part of the changes in energy intensity in developing countries. 6 For this reason, the fact that estimates of income elasticity of energy demand in the developing countries are significantly higher than unity has been attributed to structural changes. If income elasticity estimates obtained for the 1960-75 period (1.19 and 1.52 for OIDCs and OXDCs, respectively) 7 are relevant also for the 1970-82 period, it is pertinent to ask what the energy intensity in 1982 would have been if there had been no petroleum price increase. Calculations show that the energy intensity index would have been 106.4 for the OIDCs and 125.0 for the OXDCs instead of 105.0 and 117.4, respectively (see Table 1).
Consumption of energy in oil-importing countries The result for the OIDCs is surprising because it suggests that the impact of energy price increases on primary energy consumption has been at best only minor. A number of broad observations may provide some clues to the factors that accounted for the changes in the OIDCs' energy/GDP relationship. First, there is little evidence that structural changes towards higher energy intensity accelerated in the last ten years to offset the possible impact of energy price increases. The growth rate of industrial-sector GDP 8 in the OIDCs slowed down from 9.0% per annum between 1960 and 1973 to 4.3% between 1973 and 1982 (GDP growth rate slowed down from 5.4% to 3.8% between the two periods). Data on
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sectoral energy consumption for 19 OIDCs s show that industrial-sector final energy consumption increased at 4.2% per annum between 1973 and 1982, only slightly higher than the 4.1% per annum growth of total final energy consumption over the same period. 9 It was the 'other' sectors (mainly the residential, commercial and agricultural sectors) that experienced the fastest increase (5.6%) in final energy consumption during this period, while that of the transportation sector grew at only 2.9% per annum. These trends leave an unmistakable impression that the quantum increases in international petroleum prices had no major impact on total primary energy consumption in OIDCs. The majority of these countries quickly adjusted domestic petroleum prices to international levels in the wake of the international petroleum price increases. As of mid1982, their domestic petroleum product prices stood roughly at a par with the oil-importing industrial countries. ~° However, price adjustments for other forms of energy have been sluggish. For example, of 33 developing countries recently surveyed by the World Bank, only seven had electricity prices greater than, or equal to, the long-run marginal cost of supply, tt These surveys also revealed that the prices of coal and natural gas in a number of the developing countries where they are domestically produced have not been adjusted sufficiently upward to reflect their replacement costs. This pricing structure partly explains the sharp drop in the share of petroleum in the OIDCs' total primary energy consumption (Table 1) which is as large in percentage terms as that of the OECD countries for the 1973-82 period. The quick adjustment of petroleum prices probably explains the relatively slow growth of the transportation sector's final energy consumption. The availability of relatively inexpensive energy sources such as hydro or nuclear electricity, coal and natural gas enabled the industrial and 'other' sectors to continue the historical aggregate energy/output (income) relationship. At the aggregate level, the share of primary electricity in the OIDCs' primary energy consumption increased by more than 5% between 1973 and 1982, followed by coal (2.6%) and natural gas (1.2%). The share of petroleum in primary energy consumption fell by 9% over this period. This means that the growth rate of petroleum consumption was limited to 2.5% annually, most of which occurred before 1980. At the sectoral level, it was the thermal electrical power sector of the 19 OIDCs in the International Energy Agency survey that achieved the largest
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percentage decline in the share of petroleum - from 49.5% in 1973 to 37.3% in 1982. The main substitute for petroleum was coal - its share increased by 10%. This increase was by virtue of sharp increases in coal-fired power generation in only a few countries, however, such as India and the Republic of Korea. Natural gas made a major contribution to thermal electric power in Colombia, Peru, Pakistan and Thailand. Petroleum's share in the industrial sector's energy consumption declined from 46.9% to 40.8% over the 1973-82 period. The main substitute was electricity; its share increased by 4%. Practically all of the 19 OIDCs in the sample joined in this increase. Coal was the second most important substitute for petroleum, but only in a limited number of countries such as India, the Republic of Korea, Brazil and Colombia. Natural gas was an important contributor in Brazil, India and Bangladesh, although its total share failed to increase over the period. The rapid increases in energy consumption in the 'other' sectors mainly consisted of increases in electricity; its share increased from 17.6% to 23%. This allowed a relatively small decline in the share of petroleum, from 52.3% to 50.5%. Coal's share declined sharply, suggesting that coal is an inferior fuel for residential use even in developing countries. Natural gas substantially expanded its residential market share in Argentina, Chile, India, Pakistan and Bangladesh, but its share for the total of the 19 sample OIDCs increased only from 5.1% to 6.3%.
Consumption of energy in oil-exporting countries The fact that the GDP of the OXDCs is heavily influenced by their petroleum production complicates the analysis of the energy/GDP relationship. It is not surprising that primary energy consumption increased at a much faster rate than GDP (1.38 times faster between 1973 and 1982) in these countries because GDP growth was slowed down considerably by the decline in OPEC crude oil production which did not have significant direct consequences for energy consumption. The availability of low-cost energy would seem conducive to energy-intensive structural changes in these countries but adjustments up to 1982 show little evidence that the energy intensiveness of their industrial output has accelerated since 1973. The GDP of the manufacturing and construction sectors of the OXDCs grew at 7.1% between 1973 and 1982 but energy consumption of the industrial sectors in a sample of 18 OXDCs increased only at 5.4% over the same period. 12 In contrast, it was the transportation sector of the 18 OXDCs that experienced the most rapid increase in
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energy consumption (9.3% between 1973 and 1982), followed by the 'other' sector (7.8% over the same period). Sectoral differences in energy consumption growth rates are consistent with the fact that it was the non-mining and non-manufacturing sectors of the OXDCs that experienced the fastest increase in value added. Domestic pricing of petroleum products in the OXDCs, not to mention the prices of other energy products, only recently started to catch up with international levels. This explains the fact that the OXDCs have made little progress in substituting other fuels for petroleum. Petroleum's share in total primary energy consumption dropped by only 1.2% between 1973 and 1982 - a fall which was made up mainly by an increase in the share of natural gas. In addition to the distorted pricing structure, the slow adjustment was partly attributable to the lack of infrastructure. However, even in power generation, where infrastructure requirements per unit of natural gas delivered are expected to be relatively small, natural gas failed to increase its share of the market, increasing only from 32.4% to 32.8% in the 18 OXDCs over the 1973-82 period. The share of natural gas in the industrial sector declined by almost 7% over this period, while increasing in the other sectors by 4%. Coal and primary electricity have played an insignificant role in the OXDCs. In summary, it appears that the impact of the dramatic increases in international petroleum prices on total primary energy consumption has been only minor in both OIDCs and OXDCs. Until recently, efforts to improve energy efficiency through substitution of other factor inputs for energy have not gathered sufficient momentum to make a significant difference in the energy/GDP relationship. However, there are strong indications that the OIDCs achieved substantial savings in petroleum consumption through substitution of other fuels for petroleum.
Supply On the supply side, the OIDCs were more successful in increasing supplies of coal and primary electricity than petroleum and natural gas. Of the increment in primary energy supplies between 1973 and 1982, coal and primary electricity accounted for 44% and 32% respectively compared with 24% for petroleum and natural gas combined. Petroleum production in the OIDCs increased from 1.34 million barrels per day (bbl/day) in 1973 to 1.91 million bbl/day in 1982; the increase occurred mostly in the 1978-82 period and in the countries that were already established producers. 13 The ENERGY POLICY August 1985
World energy markets and the developing countries
countries that had large increases were India, Peru, Argentina, Brazil and Burma. Proven reserves for petroleum in the OIDCs increased from 6.7 billion barrels at the end of 1975 to 9.8 billion barrels as of the end of 1984, largely through sizable reserve additions in established producers, particularly India and Brazil. 14 The number of wells completed in the OIDCs increased 2.5 times between 1973 and 1980, roughly the same rate as that of the total number of wells completed in the market-economy countries but they represented only a small proportion (3%) of the total. Exploratory (wildcat) wells drilled did not increase as fast as the total number of wells completed, ~5 implying that the response time for exploration decisions is longer than that for development and extension drilling. Although total petroleum production in the OXDCs declined between 1973 and 1982, there was a disparity between the OPEC and the non-OPEC countries in this group; OPEC production declined by 36%, while that of non-OPEC oil exporters increased by 293%. The level of exploratory and development activity in the OXDCs has not picked up as vigorously as in the OIDCs. However, reserve discoveries and production increases in the nonOPEC oil-exporting developing countries have been phenomenal; proven reserves of this group currently stand at 64.5 billion barrels compared with 32.6 billion in late 1975, largely due to discoveries in Mexico. Developing country coal producers 16 have significantly stepped up production of coal since 1973, contributing to the restraint in the growth of petroleum demand. A few of these countries Republic of Korea, Spain, Turkey and the Philippines - have chosen to increase imports of coal. However, for the majority of the developing countries, coal has not emerged as a viable option. A large number of developing countries benefitted from increased supplies of primary electricity, most of them by increasing supplies of hydroelectric power and for a few, by increasing nuclear electricity generation. Efforts to increase domestic supplies of energy have helped to limit the increase in the OIDCs' net petroleum imports to 18% between 1973 and 1982, during a period when primary energy consumption increased by 470/0.17 Although this represents a significant departure from the pre-1973 trends, the adjustment performance certainly has been less than seems optimal given the changes in energy prices. The adjustment record has been particularly poor in a number of small developing countries which
ENERGY POLICY August 1985
neither had viable supply options (or failed to exploit available supply potential) nor made serious efforts to improve energy efficiency. Some countries registered substantial reductions in energy consumption only at the cost of a devastating performance of their economies.
PROSPECTS TO 1995
Before looking to the future, it is useful to look again at why the developing countries failed to achieve significant energy savings over the past decade. The reasons are complex and diverse, but the following factors may have general relevance: • • • •
Low domestic energy prices and lack of nonprice incentives. Scarcity and high cost of capital, limiting its use as a substitute for energy. Lack of technology and management to capitalize on energy saving potential. Lack of sufficient economies of scale to justify the necessary infrastructure investment.
Are these conditions, or any other factors that inhibited adjustment in the last ten years, likely to change so as to significantly alter the past trend in energy demand? The answer to this question can only be speculative. It depends, among other things, on the state of the international economic environment and how it affects the provision of capital and technology needed by the developing countries. The purpose of the projections here is to indicate the broad trends in the developing countries' energy balances under the following assumptions:IS •
•
OIDCs will raise energy prices to the level of opportunity costs and OXDCs will raise prices to 30-50% of the level of opportunity costs. Income elasticities for energy will range between 1.1 to 1.4 and price elasticities between -0.3 to -0.5, depending on the sector and the region.
It is further assumed that the energy demand adjustments the developing countries failed to achieve in the last ten years represent adjustment lags and these adjustments will be realized within the next ten years. This may be considered an optimistic assumption and its realization probably will depend on strong action in terms of the developing countries' policies and priorities. 19 Projections of petroleum and natural gas supplies are based on a country-by-country assessment of
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their supply capability from known and prospective reserves and their relationship with international market conditions in the case of the OXDCs. Supplies of primary electricity are projected on the basis of investment projects already in the pipeline. Coal supplies are determined by competitive supply and demand equilibrium. Table 2 presents the energy balance projections for the developing countries; assumptions about GDP growth and the price of OPEC crude oil are noted at the bottom. The OIDCs are projected to increase their primary energy consumption at a rate slightly lower than that of GDP growth. This implies a decline in the energy intensity of GDP, primarily through the delayed impact of the past energy price increases on energy demand. The share of petroleum in OIDC primary energy consumption is projected to decline by 10% between 1982 and 1995. Energy intensity of GDP in the OXDCs is expected to continue to rise, although only slightly, despite partial rationalization of their domestic price structure. This is because these countries have comparative advantage in energy-intensive industries and, unlike the past ten years, are expected to exploit this opportunity more fully. Energy demand increases, however, will be met increasingly by natural gas that has a lower opportunity cost than petroleum. By 1995 the developing countries are expected to become a more important group in the world energy markets than they are now; their share of global
Table 2. Projections of developing countries' energy balances, 1982-95. 1983 1990 1995 (million bbl/day of oil equivalent) OIDCs Primary energy demand Petroleum Coal Primary electricity
Growth rates 1982-95 (percentage)
13.5 7.1 3.7 2.0
18.2 8.2 5.1 3.6
23.0 9.6 6.0 5.4
4.2 2.3 3.8 7.9
Primary energy supply Petroleum
8.3 1.9
13.3 2.8
17.0 3.1
5.7 3.8
OXDCs Primary energy demand Petroleum Natural gas
7.7 5.3 1.9
11.2 7.0 3.3
14.6 8.5 4.7
5.0 3.7 7.2
28.1 25.1
34.9 29.2
43.4 35.1
3.4 2.6
Primary energy supply Petroleum
Memo items: Assumptions GDP growth rates (percentage) OIDCs OXDCs OPEC oil price (1983 US$/barrel)
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1983 29.1
1982-90 4.2 4.4 1985 25.9
1990 27.5
1990-95 5.0 5.2 1995 36.1
primary energy consumption is expected to increase from 16% in 1982 to 21% in 1995 and primary energy production, from 27% to 33%. As the import demand for petroleum in the oil-importing industrial countries recovers in the years ahead, production and exports of petroleum of the OXDCs are expected to follow a rising trend, particularly in the 1990s. By 1995, the demand for OPEC oil is projected to be around 28 million bbl/day. The OIDCs are expected to contain the growth of net petroleum imports to within 25% above their 1982 level. To do so requires more vigorous conservation and exploration and production of petroleum than in the last ten years.
CONCLUSIONS The developing countries' primary energy consumption has been increasing rapidly since 1973. The impact on total primary energy demand of the dramatic increases in international petroleum prices has been up until now only minor. The OIDCs were successful in substituting other fuels for petroleum but the OXDCs as a whole failed to increase the share of natural gas in relation to petroleum even in the thermal electric power market where substitution is deemed relatively easy. The developing countries face more difficulties than the industrial countries in adjusting to higher energy prices. However, there is a need for much stronger action in energy-related policies. On the basis that stronger action will be taken - in particular that domestic energy prices will be adjusted to their opportunity costs - it is projected that there will be a reduction in energy intensity in OIDCs and a sharp decline in the share of petroleum in total energy demand. By 1995 the developing countries will be a more important force in world energy markets both in terms of consumption and production.
The World Bank does not accept responsibility for the views expressed herein which are those of the author and should not be attributed to the World Bank or its affiliated organizations. The findings, interpretations and conclusions are the results of research supported by the Bank but they do not necessarily represent official policy. The designations employed and the presentation of material in this paper are solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, city, area or of its authorities or concerning the delimitation of its boundaries or national affiliation. 1The developing countries here include only the market-economy
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World energy markets and the developing countries"
developing countries. Excluded are the centrally planned economies in Asia (including the People's Republic of China and others), Europe (except Yugoslavia) and Cuba. Among the member countries of the Organization for Economic Cooperation and Development (OECD), Greece, Portugal, Spain and Turkey are treated as developing countries. All members of the Organization of Petroleum Exporting Countries (OPEC) are included. 2The oU-exporting developing countries include the member countries of OPEC and the following non-OPEC oil exporters: Angola, Bahrain, Bolivia, Brunei, Congo, Egypt, Malaysia, Mexico, Oman, Syria, Trinidad and Tobago, Tunisia and Zaire. All other developing countries are treated as the oil-importing developing countries. 3This paper deals only with primary 'commercial' energy. Due to the paucity of data, the traditional fuels (such as wood and biomass) are not considered despite their importance in developing countries. Primary energy consumption is defined to include aviation and maritime bunkers and the 'unallocated' category, according to the UN statistical office. Primary electricity is converted into oil equivalent of primary energy in terms of fossil fuel requirement per unit of electricity in conventional thermal power plants. 4The growth rate substantially decelerated during 1980-82 to 3.8%, after increasing at 5.7% during 1973-80. The growth rates for the OIDCs and the OXDCs were 4.3% and 7.0%, respectively, for the 1973-82 period. In contrast, primary energy consumption in the OECD countries remained virtually unchanged. 5Energy intensity of GDP, taken as the measure of aggregate income (output), is the amount of total primary energy consumption per unit of GDP. GDP of individual countries is measured at the constant prices of a base year (1980 for the developing countries and 1975 for the OECD countries) and aggregated at the constant exchange rates of the base year. 6Although it is well recognized that structural changes in the developing countries have had a major impact on their energy consumption, measurement of this impact has been elusive primarily because of the lack of adequate data. See, for example, L. Hoffmann, 'Energy demand in developing countries: approaches to estimation and projection', Workshop on Energy
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Data of Developing Countries, Vol 1, International Energy Agency (lEA), Paris, 1977. ZB.J. Choe, 'Energy demand in developing countries', in J. Dunkerley, ed, International Energy Strategies, Oelgeschlager, Gunn and Hains, Cambridge, MA, 1980. 8Combined GDP of mining, manufacturing and construction sectors. 9International Energy Agency, Energy Balances of Developing Countries, 1971/82, lEA, Paris, 1984. The 19 countries covered 65% of the OIDCs' primary energy consumption in 1982. 1°There were a few exceptions in that some countries subsidized some products such as automotive diesel oil and kerosine. l~World Bank, The Energy Transition in Developing Countries, World Bank, Washington, DC, 1983, p 16. 12International Energy Agency, Energy Balances of Developing Countries, 1971/82, lEA, Paris, 1984. The 18 countries accounted for 73% of the OXDCs' primary energy consumption in 1982. ~3The OIDCs that discovered petroleum and became petroleum producers in recent years are Benin, Cameroon, Ghana, Ivory Coast, Guatemala, Surinam and the Philippines. Their total production in 1984 was 0.17 million bbl/day, of which 0.12 million bbl/day belonged to Cameroon. 140il and Gas Journal, various issues. 1SWorld Bank, up cit, Ref 11, p 27. ~61ndia, the Republic of Korea, Spain, Turkey, Yugoslavia, Colombia, Thailand, Pakistan, Brazil, Mexico, South Africa and Morocco. l ZDuring the same period, the OECD countries reduced their net petroleum imports by 32%, through reduction of energy intensity of output and fuel substitution. 18More details of the projection methodology and assumptions can be found in B.J. Choe, A Model of World Energy Markets and OPEC Pricing, World Bank Staff Working Paper No 633, World Bank, Washington, DC, 1984. ~gTo date, only a few OIDCs have taken steps to seriously address their energy issues. For a survey, see Energy Issues and Options in Thirty Developing Countries, report of the Joint UNDP/World Bank Energy Sector Assessment Program, August 1984.
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