Well, if I had money tell you what I'd do
I'd go downtown and buy a Mercury or two
Crazy 'bout a Mercury, Lord I'm crazy 'bout a Mercury
I'm gonna buy me a Mercury and cruise it up and down the road
— from David Lindley's version of Mercury Blues
The Paris-based International Energy Agency has issued its World Energy Outlook 2007 — China and India Insights. The release provoked the usual firestorm of handwringing and protest. "I am sorry to say this, but we are headed toward really bad days," IEA chief economist Fatih Birol told Time Magazine this week. "Lots of targets have been set but very little has been done. There is a lot of talk and no action." Lest the peak oil people feel justified by the bad news, Birol made sure to divorce the IEA's position from any possible connection with peak oil (see David Strahan's Supply Crunch is not Peak Oil — IEA, November 7th, 2007). Oh my! Rather than explain the intricacies of everyone's position here, let's talk about the human love affair with cars as a way of understanding the IEA's annual report.
The thing to keep in mind about motorized vehicles is that almost everyone on Earth who can afford one wants one. The IEA's WEO 2007 oil fact sheet gives the usual demand-driven result: the world will want to consume 116 million barrels per day of oil in 2030. The desire for transport "is the main driver." More precisely, the would-be driver is the main driver in every sense of that word.
The WEO 2007's special focus is on fast-growing energy demand in China and India. The IEA predicts that an astonishing 42% of increased demand for oil will come from those two countries alone, and there is a simple reason for their growing thirst. The IEA expects that GDP will grow in Asia and household incomes will rise accordingly. When incomes rise, people want cars. When people want cars, they require fuel to run them. Therefore we will need 116 million barrels of the stuff everyday, mostly to satisfy our desire to drive. This is the oil part of the IEA's WEO 2007 in a nutshell.
What makes future growth in demand for cars predictable? To answer this question, it is necessary to look at the methodology and assumptions used by the IEA to construct the WEO and specifically, the transport sector module (p. 9). Things get a bit technical here, but don't worry.
As the largest share of energy demand in transport comes from oil use for road transport we have updated the WEM with a detailed sub-model based on an S-shaped Gompertz function, proposed in a paper titled Vehicle Ownership and Income Growth, Worldwide: 1960-2030 by Joyce Dargay, Dermot Gately and Martin Sommer [henceforth VOIG]. This model gives the vehicle ownership based on income (our GDP assumptions through to 2030) and 2 variables: the saturation level (assumed to be the maximum vehicle ownership of a country/region) and the speed at which the saturation level is reached. The equation used is:
Where V is the vehicle ownership (expressed as number of vehicles per 1000 people), y is the saturation level (expressed as number of vehicles per 1000 people), a and b are negative parameters defining the shape of the function (i.e. the speed of reaching saturation). The saturation level is based on several country/region specific factors such as population density, urbanization and infrastructure development...
Passenger car ownership is then calculated based on the vehicle breakdown from World Road Statistics 2006 from the International Road Federation plus other regional statistics. Using the equation above, changes in passenger car ownership over time are modelled, based on the average current global passenger car ownership. Both total vehicle stock and passenger vehicle stock projections are then derived based on our population assumptions. [links, emphasis added]
The function that produces the S-shaped curve provides a model for understanding market penetration over time for a new or existing technology, e.g. cars, ipods or cellphones. Examining the historical data from 1960 to 2002 in 45 countries, the VOIG economists found that the Gompertz function defined above was the best model describing past growth in car ownership. This function was then applied to the future based on predictions of GDP and population growth, the expected degree of urbanization or population density, how many roads will be built, etc.
The graph (first above left) shows an illustrative Gompertz function and its implied income elasticity. The function (on the left) shows the growth curve over time. The curve eventually flattens out—this is the point of saturation and no more growth in vehicle ownership per thousand people occurs as income rises. However, if a country's population expands, the total number of cars will continue to grow.
The income elasticity of demand for cars (on the right) is a bit tricky, but can be easily explained. The number of cars people buy—actually the percent change in the quantity of cars demanded—rises with income, but this growth rate is not steady (linear). As soon as people can afford one, they buy a car, and increasing income levels stimulate fewer car purchases thereafter. The VOIG economists explain—
The relationship between the growth of vehicle ownership and per-capita income is highly non-linear. Vehicle ownership grows relatively slowly at the lowest levels of per capita income, then about twice as fast as income at middle-income levels (from $3,000 to $10,000 per capita), and finally, about as fast as income at higher income levels, before reaching saturation at the highest levels of income.
The second graph (above left) shows the projected Gompertz curves and associated income elasticities for six different countries, the USA, France, and the Netherlands representing the developed (OECD) economies (left), and Indonesia, China and India on the undeveloped side. Saturation levels vary among the various countries, as do the income elasticities. For example, "USA and France have similar saturation levels but different low-income curvatures: USA reaches 200 vehicle ownership at per-capita income of $7,000 while France reaches it at $9,400." Thus Americans are slightly more car crazy, just a bit more eager to own a car when they can afford it. This is probably due to the relative size of the two countries and America's traditional car culture.
The OECD economies are at or near their saturation levels, but that's not the case in the developing world. The saturation levels shown for the Asian countries are projections derived from the Gompertz model. The authors give their results—
We project that the total vehicle stock will increase from about 800 million in 2002 to over 2 billion units in 2030. By this time, 56% of the world’s vehicles will be owned by non-OECD countries, compared with 24% in 2002. In particular, China’s vehicle stock will increase nearly twenty-fold, to 390 million in 2030. This fast speed of vehicle ownership expansion implies rapid growth in oil demand...
By 2030, China will have 269 vehicles per 1000 people – comparable to vehicle ownership levels of Japan and Western Europe in the early 1970’s – and it will have more vehicles than any other country: 24% more vehicles than the USA. China’s vehicle ownership is projected to grow rapidly for two reasons: (1) its projected high growth rate for per-capita income during 2002-2030, 4.8% (which is actually much slower than its recent rapid growth), and (2) vehicle ownership is growing 2.2 times as fast as per-capita income, as it passes through the middle level of per-capita income ($3,000 to $10,000) with the highest income-elasticity of vehicle ownership. Similarly for India and Indonesia...
The Chinese are, and will be, snapping up automobiles as soon as their income levels permit it. The prediction (graph left) is that there will be over 2 billion vehicles on the Earth by 2030. And China will not yet be saturated. The countries graph above clearly shows that China's saturation level is predicted to reach 800 vehicles per thousand people, whereas their level of saturation will only be about 34% of that level (269 cars) in 2030. There's still plenty of room for growth! Not to mention Indonesia and India...
Elizabeth Kolbert, author of Field Notes from a Catastrophe, an excellent book on climate change for the non-scientist, recently published an insightful article in the New Yorker called Running on Fumes: Does the "car of the future" have a future? Talking about "techno-optimists" like Iain Carson and Vijay Vaitheeswaran, who are promoting this car of the future, Kolbert had this to say—
Yet their [the techno-optimists] argument rests on an account of global trends that is nothing short of terrifying...
Were China and India to increase their rates of car ownership to the point where per-capita oil consumption reached just half of American levels, the two countries would burn through a hundred million additional barrels a day. (Currently, total global oil use is eighty-six million barrels a day.) Were they to match U.S. consumption levels, they would require an extra two hundred million barrels a day. It’s difficult to imagine how such enormous quantities of oil could be found, but, if they could, the result would be catastrophe. “Just consider the scale of the potential problem—for instance, the effect on global warming of seven hundred and fifty million more cars in India and China, belching carbon dioxide,” Carson and Vaitheeswaran write.
Techno-optimists believe that business as usual can continue indefinitely. Although one can imagine global gridlock, the ultimate traffic jam in which every square meter of drivable surface on the Earth has a car sitting on it, the cornucopian principle that there are no practical limits to growth is still held sacred. All that's necessary to do is to change automobile technology by switching over to so-called hypercars that get 100 miles per gallon or some other nifty alternative. But Kolbert isn't buying it.
... improving gas mileage will take us only so far. Once the Chinese and the Indians really start driving, doubled or even tripled fuel efficiency won’t suffice. This is why Carson and Vaitheeswaran regard the Prius merely as a stopgap: the true car of the future has to accommodate everyone, which is to say six and a half billion, soon to be nine billion, people.
Hard-core techno-optimists insist that this goal, too, could be met, if only automakers and politicians would apply themselves to the task that up to now they’ve taken such pains to avoid. This is a comforting argument; unfortunately, though, it assumes precisely what’s at issue. After all, just because someone has never bothered to enter the New York City Marathon doesn’t mean that if he runs in it he’ll win.
Unknowingly using some standard peak oil energy arguments, Kolbert reports that she simply can not see where the energy is going to come from to power all these future cars, whether they are lightweight, carbon-fiber hypercars or not. She concludes with this—
If someone, somewhere, comes up with a source of power that is safe, inexpensive, and for all intents and purposes inexhaustible, then we, the Chinese, the Indians, and everyone else on the planet can keep on truckin’. Barring that, the car of the future may turn out to be no car at all.
Bravo! Elizabeth Kolbert, an incisive and gifted writer, has accomplished something the IEA and their economists have all failed to do—she has figured the problem out and suggested the most probable outcome. We are grateful for her insight, which provides a context for understanding the IEA's World Energy Outlook 2007. And on that cheerful note, have a Happy Thanksgiving.
Contact the author at [the original article].
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