Monday, April 2, 2012

What's Driving Gas Price Rises?

Three forces, industrialization, post-industrialization and population size.  Consider the following figure.

Here we see per capita GDP presented as a proportion of the United States per capita GDP from 1997 to 2010. The source of this data is the World Bank.

Per capita GDP results from taking "the market value of all goods and services produced by a country," and then dividing it by the population size.  Per capita GDP can, therefore, be thought of as a representation of standard of living in a country.

I used the United States as the base case here.  That means, for every year I took the US per capita GDP and set its value at 100.  Every other country on the figure shows the percentage of US per capita GDP.  So, don't take this as meaning the United States isn't improving - but look at this as a global race of "keeping up with the Joneses," with the U.S. being the Joneses.

I present data on three advanced economies, the United States (always at 100, see above), Canada and Norway.  Note that the US and Canada are relatively stable while Norway has experienced increasing standards of living over the last decade.

More important to our story, though, is that of the BRICS.  Brazil, Russia, India, China and South Africa are some of the fastest growing, large population economies in the world.  Brazil (205mm) and Russia (138mm) each have around half the population of the United States and  South Africa (49mm) has about an eight of the population.  India (1.2bn) and China (1.3bn) are around 4x a large as the United States.

Each of these countries has benefited from globalization.  Increased manufacturing has moved these countries through a rapid industrialization phase.  As manufacturing increased, so to did global fuel consumption.  In the United States, we felt this as rising gas prices.

However, each of these countries is also moving towards post-industrialization.  During this transition, economies tend to experience an increasing middle class accompanied by consumption patterns people in advanced economies take for granted.  The net result is another fuel consumption explosion.

The above figure shows the move towards post-industrialization for the BRICS.  Russia is rapidly approaching this spot.  Brazil and South Africa, while closer to the US than India and China seem relatively stagnant.

China and India though, while the farthest back, are clearly making up the most ground.  Both are on pace to achieve 20% of the US standard of living in the next decade.  That's 8x the people experiencing 1/5 the standard of living.  Or... roughly 1.5x the potential consumption to the United States.  Move forwards another decade and you're looking at something in the vicinity of 8x the population enjoying 1/3 the standard of living.  That's about the equivalent of 2.4 US consumption patterns.

That's a lot more cars, televisions, mobile devices, computers and the like.  That's a lot more fuel consumption.  That's a guarantee that fuel prices will continue to rise... and rise at a faster rate most likely.

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