Chindia: A Tale of Two Growing Economies
The world economy hasn’t fully recovered yet but it seems that the price of oil has. It has been steadily rising after it dropped to a low of $32/barrel in December, 2008. Average WTI prices per barrel of oil during 2009, 2010 and 2011 were $62, $79 and $95. The price of oil for this year so far is $105. A discussion on higher oil prices is incomplete without talking about Chindia. Chindia is a phrase that refers to China and India together.
In the international media – particularly in North America – there is almost an obsession with Chindia, particularly with its economic growth and impact on the world oil market. For instance, when Republicans blamed President Barack Obama for rising gasoline prices in the US, the President (on Feb 24, 2012), blamed the emerging economies like India, China and Brazil for rising oil demand and the resulting spike in the price of oil.
The International Energy Agency (IEA) predicts that global oil demand will increase slowly over the next 25 years, from 87 million barrels/day in 2010 to 99 million barrels/day in 2035; this growth is attributed to the non-OECD countries and Chindia in particular.
There are a lot of similarities between these countries (China and India). Both have over one billion in population (together they contain 2.6 billion of the world’s 7 billion people), an unprecedented number of people in China and India are projected to rise above the poverty line and enter the global middle class, both are regarded as the fastest growing major economies in the world, and so on.
Yet there are, however, crucial differences between the two countries and one of the main differences is that, as of today, China’s oil demand is over two times higher than that of India and this trend will continue in the future. Today, China’s population is about 130 million higher than India’s, but because India is growing so much faster than China (in terms of population), it is expected that by 2035, India will become the world’s most populous nation. Despite this, by 2035, India’s oil demand will be only half that of China’s.
What’s the reason for such a big difference in oil demand? One way to think about this question is by comparing economies and Gross Domestic Product (GDP) growth in particular. One of the main reasons for such a vast difference is that China’s economy is different and stronger than India’s and there are a number of factors that account for this.
Historically, there is a strong correlation between GDP and oil consumption. The more goods and services a particular economy has produced, the more oil it has needed in order to produce them. More gasoline and diesel fuel is needed to move goods and people. Higher GDP growth results in higher income for the population, lower mortality rates, higher life expectancy, better education for people and, more importantly, higher consumer spending. This extra consumption and spending stimulates the economy, as supply is increased to satisfy demand, and, for this cycle to continue, more oil is required.
So, stronger GDP growth in China, compared to India, is the main reason for its higher oil demand. China retained the title of second largest GDP in the world, after the US, in 2010, with a GDP of $5.8 trillion. India occupied 9th position in the same year with a GDP of $1.6 trillion. Historically, the Chinese economy has grown at an average annual rate of 9 percent for the last 3 decades, while India’s economy has grown at around 6-7 percent per year over the same period.
Both countries were among the world’s most ancient civilizations and their differences in GDP growth are influenced by a number of social, political, cultural and economic factors. Among these factors, one that drives oil consumption higher in China is that China is strong in manufacturing and infrastructure while India is perceived to be strong in services and the IT sector.
We can picture the potential impact of the quick growth of Chindia by considering an extreme scenario, one in which Chinese and Indians eventually come to consume as much oil per capita as North Americans. In this scenario, even if all other countries apart from China and India were to maintain current consumption levels, the world’s oil consumption would be over 200 million barrels a day, instead of the 87 million barrels per day it is now.
There is some reason to be optimistic about the long term future, however, as mature economies seem to have a tendency to become more efficient over time and become able to sustain economic growth while the growth of oil consumption slows down and even stops. From the below Figure, you can see that oil consumption for OECD nations is expected to fall over the next 25 years.
The global outlook for the next few decades is nevertheless bleak. Although a handful of OECD countries have been able to achieve growth without increasing oil demand, in the fastest growing economies such as Chindia, there is still a positive correlation between GDP and oil demand and these economies are very far from mature. Their impact on global oil consumption is more than offsetting the comparably small gains in efficiency of the mature economies.
While it should be the goal for every nation to decouple GDP growth and oil consumption as early as possible, success will depend on a myriad of factors, including policies to curb CO2 emissions, fuel and efficiency standards for vehicles, the role of renewables and consumer behavior.
(Note: Above opinions are my own and not of Suncor Energy Inc.)