Musings: Population Demographics, Energy Consumption
In our last Musings we discussed the aging population challenge China’s economy may be confronting and its possible ramifications on the country’s future energy consumption. We have been doing more research on the question of population aging and energy consumption because the world is certainly aging, which is likely to impact energy needs globally, and especially in certain geographic regions. The challenge is finding research that has even attempted to isolate the impact of age from other variables impacting consumption such as income, household size and location of residence.
The most interesting research we found came from work associated with understanding the drivers of carbon emissions (global warming) and how the amount of emissions might be impacted by specific government actions. The paper was initiated by the authors in response to a view that by merely multiplying energy use per capita by the growth in future population, one could easily ascertain the likely amount of carbon emissions from increased fossil fuel usage. The study’s authors suggested that the variables mentioned above were worthy of further research, but they concluded that the most important impact on energy consumption was the size of households. While this factor will certainly impact the amount of energy consumed, it too is impacted by aging populations as many older individuals wind up as single-person households increasing the amount of energy used per household.
Included in the study was some research on the amount of residential energy and transportation energy used by consumers by their age. What the results of a series of historical surveys showed was that residential energy consumption rose with the age of the consumer while transportation energy consumed rose initially and then went into modest decline at about age 50 followed by a much sharper decline once consumers passed age 60. These conclusions were not surprising. The data for this 2002 study was from the United States in the 1980s and 1990s.
A 2009 study on consumer spending by age group conducted by the United Nations Economic Commission for Europe essentially confirmed the results from the earlier U.S. study. The spending on housing and residential energy shows that people over age 60 spent the largest amount of their total spending on this category. What we can’t tell is how the spending is divided between housing and residential energy. It is also possible that the expenditure percentage is influenced by reduced spending in other categories such as communications, education, recreation and clothing, for example.
What we also see in the UN study is that transportation spending drops with age. That conclusion is supported by data from the U.S. Federal Highway Administration showing miles driven by the age of the primary driver. According to the data, once an American driver reaches 60 years old, the number of miles he drives falls steadily with further aging. Importantly, upon reaching age 60 the number of
miles driven by this older driver falls below the miles driven by early teenage drivers. This is not surprising as both the skills and needs of an older driver declines with age.
The impact of this aging phenomenon on energy consumption in China was highlighted in the last Musings issue. We find it interesting to compare the age pyramid of China with that of Japan in the past, currently and as projected by the end of the next decade. As one scrolls through the exhibits and the collective charts reflecting movement of age groups within the population pyramids, it becomes clear the aging trend that has been ongoing in Japan and is starting to flow through the Chinese population.
When one compares the population changes that have occurred in Japan and views them in the context of Exhibit 19, which contains a chart showing annual oil consumption changes for the country over the past 33 years, it becomes possible to link population aging and reduced oil consumption. The most important aspect of this relationship is the period since the middle 1990s, which show little (mostly negative) oil consumption growth as Japan’s population aged significantly and the country’s economy struggled to grow.
In contrast, China’s energy demand growth has remained strong as its economy benefitted from strong export driven demand, a growing population, increased urbanization and an expanding middle class. The Chinese economy has also been a primary beneficiary of a large, productive youth population – the age group that is now aging. This is a dynamic about China’s future economy and its energy needs that we believe many analysts may be missing.
We believe the relationship between aging populations and slowing oil consumption is likely to be replicated in a rapidly aging China. This view is not the conventional wisdom as most forecasters focus on absolute population growth and increased oil consumption. Unfortunately, the forecasting models show China’s population growth ending within the next 5-10 years. Increased oil consumption could come from a rising standard of living, but that depends a lot on how China’s economy develops in the future.
Some analysts believe that energy consumption will continue to grow as China’s population ages because older people will continue to demand the same lifestyle they had when they were younger. We believe this trend may hold and could actually lead to China’s total energy demand continuing to rise despite an increasingly aging population. The issue is whether the residential energy consumption represents primarily electricity consumption rather than oil consumption. Natural gas may play a greater role in China’s future energy consumption as it displaces coal in response to carbon emission reduction pressures. Crude oil demand is tied to transportation needs and the trend to fewer miles driven and reduced travel with increasing age support the conclusion that China’s oil consumption growth rate will slow in the future. That conclusion is also supported by the trend to greater urbanization in China.
The latest report from China’s National Bureau of Statistics shows that a little over 46% of the country’s population lives in urban areas. The urbanization percentage is projected to climb above 50% in the next couple of years possibly reaching 65% by 2020. Of course that will depend on the evolution of China’s economy and the government’s success in relocating people from rural to urban areas, something that may become a problem if economic growth slows.
A 2004 study on energy consumption per capita in China split amongst locations shows an interesting trend. What the figures show is that rural energy consumption per capita is the highest of any location in China but that much of that energy consumption is represented by biomass. The least amount of energy consumed per capita is in urban areas. The major difference between these two extremes is the total cost of energy – rural being the lowest cost with urban the highest. From an energy market perspective, urban energy demand growth is more important because all of that energy comes from hydrocarbons in one form or another. In contrast, the large amount of biomass consumed in rural locations represents “green” energy and is non-fossil-fuel-based. The message from this study is that as China’s urbanization effort continues, there is an underlying demand growth for energy, and primarily fossil fuel energy. To the extent that China can develop alternative power sources – nuclear, wind and solar – to produce electricity, the country could slow its electricity and energy demand growth rate.
The key to a stronger economy, and hence increased oil consumption, is increased penetration by automobiles. A recent article in the Financial Times, which utilized the chart in Exhibit 21 showing the low auto penetration rate in China compared to other emerging markets such as Brazil and Russia, questioned whether the auto penetration growth rate of the past decade would continue. China’s automobile sales have grown at more than a 30% compounded annual rate for the past decade, helping to make it the largest car market in the world. In the past year, China’s auto sales grew at a 40% rate boosted somewhat by government stimulus actions including tax cuts. With the government attempting to shift China’s economy from one dependent on exports and investments to one driven by domestic consumption, the case can be made that auto sales should remain strong. Estimates are that the increase in the number of households crossing the threshold of incomes that can afford car purchases has been a prime driver of new vehicle demand. The number of households projected to cross that income threshold should rise from 35 million to 70 million in the next five years. It is this growth in the number of middle class households that underlies auto industry forecasts for more than 18 million cars being sold in China this year and that the number of cars sold will increase each year during the next five years.
We remain puzzled, however, by the lack of commensurate growth in gasoline consumption and the repeated news stories about horrendous traffic jams. A recent column in Automotive News says that the traffic jam problems of China are related more to poor urban planning than growth of the automobile fleet. The column points out that originally Beijing planned on its population being below 18 million by 2020. Given the government’s desire to grow its local economy, it has allowed its population to grow by five million people in each of the past three years. At the end of 2009, Beijing’s population stood at 17.6 million people, nearly the target for 2020. Moreover, Beijing has grown in areal extent from 305 square miles in 2000 to 801 square miles in 2007.
Importantly, only 40% of Beijing’s population uses public transportation. In response, the auto fleet grew by 345,000 units in the first half of 2010, bringing the fleet to 4.4 million vehicles. If that vehicle growth rate continues, the fleet will increase to seven million units by 2015. The same population and poor urban planning issues exist in Shanghai. In 2009, that city added 330,000 people bringing its total population to 19.2 million and its auto fleet and traffic jams have grown commensurately.
Our guess is that China’s oil demand growth will remain relatively strong for the foreseeable future, unless there is a serious disruption of its economic trajectory. We also believe that anyone looking to project China’s oil consumption growth needs to pay attention to the nation’s aging population and the structural changes underway in the economy. As The Wilson Quarterly asks on the cover it its 2010 Autumn edition: What If China Fails?