Correlation between energy usage and the rate of economic development

Salman Saif Ghouri

Abstract This paper reviews the correlation between per capita GDP and per capita consumption of different sources of energy for OPEC Member Countries, the G-7 and three Asian countries, both with and without natural logarithm. In addition, the paper estimates the ratios for total GDP and total energy consumption of different sources of energy and also estimates GDP energy consumption elasticities. The paper concludes that on a per capita basis most OPEC Countries exhibit negative and weak relationships for all forms of energy, including electricity. For the G-7 and Asian countries, this relationship is positive and strong, with the exception of oil for G-7 countries, where there is a weak correlation. Surprisingly, most OPEC Countries showed a comparatively strong and positive correlation when tested for total GDP in relation to total energy consumption of the respective energy sources. The relationship for the rest of the countries remains unchanged. Population might have distorted the results in OPEC Countries. These results suggest that one should be cautious when drawing conclusions and not ignore the aggregate comparison, as this could otherwise lead to wrong results. For G-7 countries, there has been a significant shift in the pattern of energy consumption in relation to GDP when comparing 196073 and 19732001. All adjusted downward in the later period. March 2006
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Dr Ghouri is Senior Economist at the Business Environment Section Corporate Planning of Qatar Petroleum, Doha, Qatar.

Abstract continued

However, the greatest adjustment was associated with petroleum consumption. The general conclusion is that wealth creation in G-7 countries is directly associated with the efficient use of all forms of energy. In contrast, most OPEC Countries exhibit a weaker linkage between energy consumption and economic development on a per capita basis, probably due to inefficient usage of resources or due to disproportionate distribution of wealth and thus energy usage.

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NUMBER OF studies have been carried out in the past that proved the importance of energy usage for the rate of economic development. A preliminary study (Ferguson et al, 1997) for the Group of Seven (G-7) as a whole (the United States, Canada, Japan, Germany, France, Italy and the United Kingdom) showed that there is a strong correlation between electricity usage and wealth creation, but no relationship between total energy use and wealth. More recently, Ferguson, Wilkinson and Hill (2000) expanded the scope of the study to almost all the countries of the world (more than 100 countries, comprising over 99 per cent of global GDP). The general conclusion of their study was that wealthy countries have a stronger correlation between electricity usage and wealth creation than between total energy use and wealth. In addition, they concluded that in wealthy countries the increase in wealth over time correlates with an increase in the e/E ratio (the proportion of the total primary energy supply consumed as electricity in kWh/toe).
This paper expands the scope further and attempts to investigate the principal driving energy source in economic development by assessing the relationship between various forms of energy (oil, natural gas, coal and electricity) and GDP. It also estimates the elasticity of individual sources of energy in relation to GDP in OPEC, the G-7 and some fast-growing Asian developing countries with varying GDPs, and draws a comparison. The correlation between per capita consumption of oil, natural gas, electricity and total final energy; per capita total primary energy supply; and GDP per capita is examined for the period 1971 to 2001, with and without natural logarithm.1 Like earlier studies, this one also examines the correlation between the ratio of electricity consumption to total primary energy supplies (e/E ratio, in toe) and per capita GDP. Finally, it estimates energy elasticities for individual sources of energy in respective countries. This measures how GDP varies following a one per cent increase or decrease in individual energy consumption. The measure of GDP used in this analysis is GDPPPP, compiled using purchasing power parities (PPPs). PPPs are the rates of currency conversion that eliminate the differences in price levels between countries that occur because of fluctuations in exchange rates. A given sum of money, when converted into different currencies at PPP rates, buys the same basket of goods and services in all countries. The GDP figures are given in 1995 US dollars.

1. National analysis of energy/GDP

Table 1 shows the GDP and energy profile for each country under consideration at the end of 2001. Within OPEC, GDP varied widely. It ranged from $17 billion for Qatar to as much as $561 bn for Indonesia. Six countries had GDPs over $100 bn, while the remaining five had far less than $100 bn. In sharp contrast, the G-7 countries have a strong GDP base. The United States GDP was close to $9 trillion, Japans was $3 trillion, while France, Germany, Italy and the UK all had GDPs over $1,000 bn at March 2006
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Table 1 GDP and energy profile, 2001

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2006 Organization of the Petroleum Exporting Countries Countries GDP $ bn PPP Algeria Indonesia IR Iran Iraq Kuwait SP Libyan AJ Nigeria Qatar Saudi Arabia 177 561 355 30 34 28 102 17 256 63 130 30.9 209 64.5 23.8 2.0 5.4 129.9 0.6 21.4 3.0 24.6 0.59 0.71 1.08 0.37 0.6 0.45 2.85 1.2 0.78 0.63 0.67

Per capita Per capita Per capita Per capita final total final petroleum Per capita NG Population TPES/GDP Per capita electricity energy consumption consumption TPES (toe) millions 1995 PPP GDP $ PPP consumption consumption (toe) (toe) (toe) (toe) 5,736 2,684 5,500 1,264 16,747 5,089 786 29,097 11,974 21,169 5,285 0.53 0.56 1.54 0.98 6.71 1.99 0.66 15.29 3.20 6.46 1.50 0.05 0.03 0.14 0.13 0.98 0.34 0.01 1.32 0.44 0.94 0.22 0.19 0.04 0.50 0.16 3.00 0.34 0.01 8.14 0.71 3.90 0.45 0.28 0.23 0.88 0.69 2.73 1.28 0.09 5.84 2.06 1.62 0.81 0.95 0.73 1.86 1.20 8.01 2.96 0.73 26.57 5.17 10.96 2.23

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UAE Venezuela

Table 1 (contd) GDP and energy profile, 2001

March 2006
Countries GDP $ bn PPP Population millions 2006 Organization of the Petroleum Exporting Countries India Pakistan Sri Lanka Australia Canada France Germany Italy Japan UK USA 2,707 240 57 490 832 1,394 1,922 1,287 3,125 1,293 8,977 1032.0 141.5 18.7 19.5 31.1 60.9 82.3 57.9 127.2 58.8 285.9 1.08 0.88 0.48 0.2 0.3 0.2 0.2 0.1 0.2 0.2 0.3

Per capita Per capita Per capita Per capita final total final petroleum Per capita NG TPES/GDP Per capita electricity energy consumption consumption TPES (toe) 1995 PPP GDP $ PPP consumption consumption (toe) (toe) (toe) (toe) 2,623 1,700 3,029 25,196 26,787 22,895 23,342 22,223 24,572 22,000 31,400 0.37 0.37 0.39 3.75 5.95 2.85 2.99 2.32 2.69 2.75 5.39 0.03 0.03 0.02 0.79 1.32 0.56 0.52 0.41 0.62 0.49 1.01 0.01 0.08 0.00 0.62 1.56 0.56 0.68 0.69 0.16 0.90 1.17 0.10 0.08 0.14 1.91 2.62 1.49 1.52 1.14 1.72 1.23 2.89 0.51 0.46 0.42 5.9 7.99 4.36 4.26 2.97 4.09 4.00 7.98

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Source: International Energy Agency

the end of 2001. In developing Asia, India leads with a GDP of $2,707 bn. However, per capita GDP illustrates quite a different picture. Qatars GDP was lowest among the OPEC Members, but it has the highest per capita income. The situation in Kuwait and the UAE is similar. In the G-7, all countries have per capita incomes well above $20,000 per annum. The ratio of total primary energy supplies to GDP (TPES/GDP) that measures energy efficiency is shown in table 1. The ratio measures how much energy a country uses to produce a dollar of output. For G-7 countries, it lies between 0.1 and 0.3, far less than for OPEC and the Asian countries. Further analysis of other forms of energy reveals that countries with higher per capita incomes generally consume more energy per person than countries with lower per capita incomes.

2. Energy usage in industrial activity

Table 2 shows, as a percentage, the share of each energy source used in the industrial sector. G-7 countries prudently utilize all forms of energy in their industrial sectors, depending upon their resources. The contribution of electricity is well over 20 per cent, while in most OPEC Countries the use of electricity is marginal.2 In contrast, the use of oil and natural gas in industrial activity in OPEC Countries has been substantial, owing to enormous natural gas and oil reserves in these countries. Surprisingly, even the three Asian countries use far less electricity for industrial activity. Generally these countries use more of the resource that is abundant in their respective country.

3. Energy GDP correlation

The analysis of table 3 reveals interesting and thought-provoking results. With the exception of Algeria, Indonesia and Venezuela, all OPEC Member Countries show a negative and weak relationship between electricity consumption and economic growth. In contrast, the rest of the countries in the study exhibit a strong correlation between electricity usage and economic growth. The analysis further reveals that, with the exception of Algeria, Indonesia, the Islamic Republic of Iran, Kuwait and Venezuela, all OPEC Member Countries have a weak and negative correlation between respective per capita energy consumption and per capita GDP. In sharp contrast, G-7 countries generally show a strong relationship, except in the case of oil. Meanwhile, Asian countries show a positive and strong correlation with each of the energy sources used, except for coal in Pakistan and TPES in India. The last column of table 3 supports the result of earlier studies that there is a strong relationship between electricity consumption as a proportion of total primary energy supply (e/E ratio in toe/toe) and per capita GDP. Table 4 illustrates per capita GDP and respective per capita energy consumption in natural logarithm. There is hardly any difference to the results of table 3, which is based on per capita correlation. Table 5 highlights the correlation between total GDP and respective total energy consumption in natural logarithm. The results demonstrate how much wealth is created in response to a one per cent increase (or decrease) in the use of the respective 46
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Table 2 Percentage share of respective energy source in industry Electricity Algeria Indonesia IR Iran Iraq Kuwait SP Libyan AJ Nigeria Qatar Saudi Arabia UAE Venezuela India Pakistan Sri Lanka Australia Canada France Germany Italy Japan UK USA 16.3 13.2 11.1 0.0 0.0 0.0 2.2 2.5 7.7 1.9 15.6 13.9 9.4 11.0 28.4 26.5 25.4 27.0 29.0 26.1 24.4 22.6 Oil 4.8 42.8 37.2 40.4 4.2 43.2 7.0 30.9 92.3 13.0 22.8 26.5 11.3 22.4 16.5 24.2 33.3 31.6 23.7 48.3 28.8 25.1 Natural gas 76.2 26.4 49.2 59.6 95.8 56.8 12.1 66.6 0.0 85.1 59.3 10.7 49.1 0.0 31.4 31.2 31.0 28.3 41.5 6.8 37.8 34.5 Coal 2.1 17.6 1.8 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.3 26.5 11.5 0.1 14.1 4.6 6.5 11.1 5.0 16.9 6.0 7.3

energy source. The results are quite different to the results of table 4, which is based on per capita correlation. Based on total GDP and total respective energy consumption (without dividing by population), most OPEC Countries have a positive and significant relationship between wealth creation and energy consumption. It is interesting to note that the results for G-7 and Asian countries hardly change, while OPEC Countries witness stronger results. This might be due to population, which may have March 2006
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Table 3 Correlation matrix per capita GDP/per capita energy consumption

Coal Electricity

Total primary energy supplies

0.47 0.98 0.23 0.63 0.36 0.85 0.6 0.55 0.62 0.91 0.68 0.99 0.99 0.93 0.95 0.86 0.97 0.07 0.95 0.95 0.58 0.24

Oil

Natural gas
0.23 0.94 0.88 0.24 0.83 0.65 0.66 0.47 0.87 0.79 0.48 0.97 0.97 0 0.91 0.89 0.97 0.95 0.98 0.99 0.89 0.78

Total final energy cons.

0.34 0.97 0.16 0.61 0.32 0.78 0.3 0.58 0.54 0.87 0.58 0.92 0.86 0.95 0.96 0.41 0.77 0.11 0.95 0.91 0.77 0.62

e/E ratio
0.39 0.97 0.03 0.75 0.49 0.89 0.69 0.59 0.82 0.46 0.84 0.95 0.99 0.99 0.91 0.86 0.96 0.96 0.99 0.56 0.97 0.96

Algeria Indonesia IR Iran Iraq Kuwait SP Libyan AJ Nigeria Qatar Saudi Arabia UAE Venezuela India Pakistan Sri Lanka Australia Canada France Germany Italy Japan UK USA

0 0 0 0 0 0 0 0 0 0 0 0.61 0.84 0 0.83 0.88 0.92 0.93 0.65 0.55 0.88 0.93

0.28 0.94 0.27 0.76 0.31 0.93 0.71 0.72 0.77 0.85 0.92 0.98 0.99 0.99 0.97 0.93 0.99 0.87 0.99 0.98 0.98 0.98

0.78 0.96 0.83 0.64 0.29 0.66 0.4 0.66 0.23 0.36 0.32 0.99 0.97 0.92 0.47 0.72 0.63 0.29 0.57 0.68 0.15 0.54

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Table 4 Correlation matrix in natural logarithm per capita GDP/per capita energy consumption
Total final energy cons. 0.41 0.97 0.18 0.54 0.52 0.76 0.66 0.63 0.48 0.88 0.56 0.95 0.87 0.92 0.96 0.44 0.75 0.05 0.94 0.88 0.73 0.65 Total primary energy supplies 0.51 0.98 0.47 0.57 0.37 0.80 0.64 0.60 0.57 0.89 0.67 0.99 0.99 0.91 0.95 0.88 0.96 0.16 0.94 0.94 0.53 0.21

Coal

Natural Electricity gas

Petroleum products

Algeria Indonesia IR Iran Iraq Kuwait SP Libyan AJ Nigeria Qatar Saudi Arabia UAE Venezuela India Pakistan Sri Lanka Australia Canada France Germany Italy Japan UK USA

0 0 0 0 0 0 0 0 0 0 0 0.56 0.86 0 0.88 0.91 0.96 0.87 0.63 0.55 0.95 0.93

0.33 0.99 0.35 0.67 0.37 0.85 0.71 0.78 0.65 0.73 0.84 0.97 0.99 0.99 0.95 0.95 0.99 0.88 0.99 0.989 0.979 0.985

0.44 0.89 0.14 0.20 0.78 0.33 0.76 0.47 0.91 0.79 0.46 0.94 0.97 0 0.84 0.91 0.956 0.91 0.98 0.986 0.84 0.82

0.81 0.96 0.22 0.57 0.23 0.72 0.43 0.75 0.29 0.35 0.33 0.98 0.98 0.90 0.42 0.72 0.65 0.29 0.6 0.62 0.12 0.56

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Table 5 Correlation matrix in natural logarithm GDP/energy consumption

Coal

Electricity

Natural gas

Petroleum products

Total final energy cons. 0.98 0.99 0.87 0.47 0.69 0.51 0.88 0.85 0.94 0.77 0.92 0.96 0.70 0.98 0.99 0.96 0.89 0.32 0.93 0.93 0.84 0.79

Total primary energy supplies 0.98 0.99 0.72 0.50 0.38 0.58 0.56 0.86 0.93 0.89 0.90 0.99 0.99 0.97 0.99 0.98 0.97 0.48 0.93 0.95 0.74 0.94

Algeria Indonesia IR Iran Iraq Kuwait SP Libyan AJ Nigeria Qatar Saudi Arabia UAE Venezuela India Pakistan Sri Lanka Australia Canada France Germany Italy Japan UK USA

0 0 0 0 0 0 0 0 0 0 0 0.72 0.93 0 0.42 0.87 0.94 0.90 0.536 0.27 0.94 0.91

0.96 0.99 0.83 0.52 0.79 0.58 0.76 0.81 0.92 0.94 0.89 0.99 0.99 0.99 0.98 0.98 0.99 0.91 0.99 0.98 0.97 0.99

0.94 0.91 0.88 0.27 0.30 0.75 0.75 0.84 0.77 0.77 0.91 0.97 0.99 0 0.90 0.96 0.96 0.91 0.97 0.98 0.90 0.19

0.99 0.31 0.83 0.49 0.34 0.52 0.66 0.83 0.94 0.94 0.91 0.99 0.99 0.98 0.96 0.15 0.29 0.016 0.32 0.79 0.47 0.71

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distorted the results in our per capita analysis for OPEC Countries in particular, probably due to the inefficient use of energy or disproportionate distribution of wealth. The GDP elasticities in relation to respective energy sources are tabulated in table 6. GDP elasticity measures how much wealth is created in response to a one per cent increase (or decrease) in the consumption of the respective energy source. Within OPEC, with the exception of Algeria, Indonesia, IR Iran, Iraq and Venezuela, all countries show a weak or insignificant relationship between respective energy consumption and wealth effects. Asian and G-7 countries in general witness strong elasticities except for in relation to oil, particularly in G-7 countries. That is, in G-7 countries, oil is the factor that contributes least to wealth creation because the majority of the oil is imported at a high cost and over 50 per cent is used in the transport sector. In contrast, the contribution of electricity is generally higher, followed by other types of energy. Historically, energy was cheaper prior to the oil shocks of 1973 and 1979. The historical data for G-7 countries is available from 1960. Therefore, the data was divided into two groups, 196073 and 19732001, to analyse the implications of the oil price shocks. Table 7 draws out the comparison of the correlation between per capita GDP and per capita energy consumption for G-7 countries in natural logarithm form (i.e. how much per capita GDP changes in response to a one per cent increase in per capita energy consumption). Clearly, there has been a shift in the correlation since the oil shocks of the 1970s. In general, all countries have adjusted downward, but the greatest re-adjustment has been associated with per capita petroleum consumption. The higher oil prices forced these countries to use oil more efficiently to produce a dollars worth of output, compared to years when oil was comparatively cheap. This was possible by using state-of-the-art-technology that improved over time. However, there has been a marginal shift in per capita electricity consumption in relation to per capita GDP. That is, the main driving force behind rapid economic development of G-7 countries is the greater and more efficient use of electricity and other types of energy. However, one should not ignore the importance of total energy usage, rather than focusing on a per capita basis, especially when drawing conclusions for OPEC or other developing countries.

4. Conclusions
This paper analysed the relationship between the use of different types of energy and economic development, both on a per capita and total usage basis, with and without natural logarithm, for OPEC, the G-7 and three Asian developing countries. Generally, there is a strong and positive relationship between energy consumption and economic development for the G-7 and the three Asian countries. However, a comparatively weaker association is witnessed for petroleum consumption in G-7 countries. In contrast, apart from Algeria, Indonesia, IR Iran, Kuwait and Venezuela, all OPEC Countries witness a weak and negative correlation between per capita GDP and per capita energy consumption. This relationship, however, becomes positive and stronger for almost all OPEC Countries when analyses are based on total GDP and total March 2006
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Table 6 GDP elasticities in relation to respective energy consumption Total final energy cons.
0.37 0.97 0.86 1.21 (0.04)* 0.07* (0.009)* (0.02)* 0.15 0.054* 0.56 0.035* 2.95 0.006 1.35 1.68 0.19 0.11 0.39 0.36 0.39 0.59

Coal

Electricity

Natural gas
0.01* 0.036* 0.17 0.51 (0.01)* 0.13 (0.02)* (0.02)* 0.001* 0.05* 0.042 0.02 0.81 0 1.35 0.41 0.22 0.11 0.34 0.46 0.43 0.52

Petroleum products
0.52 0.33 0.75 0.91 0.13 (0.18)* 0.02* 0.37 0.14 0.4 0.62 0.83 1.0 (0.006)* 0.019 0.1 0.04 0.042 0.1 0.049 0.015 0.17

Total primary energy supplies

0.39 0.84 0.24 1.3 (0.05)* (0.06)* 0.012* (0.03)* 0.15 0.22 (0.077)* 1.39 1.1 0.77 0.1 0.34 0.15 0.18 0.23 0.23 0.38 0.46

Algeria Indonesia Iran IR Iraq Kuwait SP Libyan AJ Nigeria Qatar Saudi Arabia UAE Venezuela India Pakistan Sri Lanka Australia Canada France Germany Italy Japan UK USA

0 0 0 0 0 0 0 0 0 0 0 0.35* 0.03 0 0.02 0.07 0.015 0.002 0.02 0.059 0.54 0.058

0.29 0.41 1.49 1.43 (0.07)* 0.10* 0.016* (0.15)* 0.04* 0.19 0.23 0.77 0.63 (0.002)* 0.79 0.51 0.32 0.13 0.66 0.47 0.57 1.107

Note: Figures in parentheses reflect the correlation matrix for 196073, while the others reflect the 1973 2001 period.

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Table 7 Correlation matrix: comparison of correlation between per capita GDP and per capita energy consumption during 196073 and 19732001 (natural logarithm)
Natural gas cons. 0.88 (0.76) 0.86 (0.99) 0.95 (0.99) 0.94 (0.96) 0.97 (0.95) 0.98 (0.98) 0.89 (0.96) 0.75 (0.97) Petroleum products cons. 0.36 (0.97) 0.72 (0.99) 0.63 (0.99) 0.37 (0.98) 0.54 (0.98) 0.58 (0.98) 0.29 (0.96) 0.54 (0.98) Total final energy cons. 0.96 (0.99) 0.11 (0.988) 0.70 (0.99) 0.39 (0.97) 0.91 (0.99) 0.86 (0.99) 0.76 (0.97) 0.58 (0.98) Total primary energy supplies 0.95 (0.99) 0.80 (0.99) 0.95 (0.99) 0.16 (0.98) 0.91 (0.99) 0.92 (0.99) 0.63 (0.98) 0.17 (0.98)

Coal cons. Australia Canada France Germany Italy Japan UK USA 0.86 (0.94) 0.87 (0.97) 0.94 (0.96) 0.87 (0.29) 0.58 (0.90) 0.42 (0.86) 0.94 (0.97) 0.91 (0.64)

Electricity cons. 0.96 (0.99) 0.92 (0.99) 0.98 (0.99) 0.86 (0.98) 0.99 (0.99) 0.92 (0.99) 0.97 (0.98) 0.98 (0.98)

Note: Figures in parentheses reflect the correlation matrix for 196073, while the others reflect the 1973 2001 period

consumption of the respective energy source. One should, therefore, be cautious when drawing conclusions based on per capita figures for developing countries. The sample period is also an important factor in analysis. For example, when analysis is carried out for G-7 countries, we see a significant downward adjustment of energy consumption after the oil price shocks of the 1970s and the events that followed (19732001), compared to periods when energy was cheaper (196073). The general conclusion of this paper is more or less in line with other earlier studies, especially in relation to electricity consumption. However, this study further extended the scope and analysed the relationships with other forms of energy as well to find the missing link. Developed and emerging economies of Asia are all heavily reliant on all forms of energy and utilize these resources efficiently in their rapid economic development. In contrast, most OPEC Countries generally failed to use the given abundant resources efficiently to accelerate the pace of economic development. March 2006
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Footnotes
1. Unless otherwise stated, we have used annual data series for each country for the period 19712001. It appears there might be some error in the reporting of data in countries where electricity usage is zero or marginal. However, our analysis is based on reported data.

2.

References
Ferguson, R., et al (1997), Benefits of electricity generation, IEE Engineering Science and Education Journal 6(6), 22559. Ferguson, Ross, Wilkinson, William, and Robert Hill (2000), Electricity use and economic development, Energy Policy 28, 92334, Elsevier. International Energy Agency (2002), Energy Statistics and Balances for OECD Countries 19602001 and Non-OECD Countries 19712001, Paris.

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