Transcript Future Energy Scenarios for the Pakistani Economy

Energy and the Pakistani Economy:
An Expletory Analysis to 2035
Dr. Robert Looney
Professor, Naval Postgraduate School
Woodrow Wilson International Center
Conference, “Meeting Pakistan’s Energy
Needs in the 21st Century”
Washington, DC, June 23, 2005
Outline

Introduction – Overview

Energy and the Economy – Historical Trends

Energy and the Economy – Empirical Studies

A Macro-Energy Forecasting Model

Seven Basic Scenarios

Energy Supply Demand Balances to 2035

Policy Implications
Pakistan: Energy Balance
70000
Kt of Oil Equivalent
60000
50000
40000
30000
20000
10000
1971
1976
1981
1986
1991
1996
2001
Pakistan Energy Balance
Energy production
Energy use
Overview



In Recent Years Rapid Economic Growth Has
Resulted in Surging Demand for Energy 1012% per annum.
Growing Gap Between Pakistan’s Energy
Needs and Domestic Production.
Government Response – 25 Year Energy Plan –
cost $37-40 billion. Comprehensive
Framework.

Assumes High Sustained Rates of Growth –
7.5%+.

Unclear on Future Energy Prices.
An Alternative View

Alternative, But Not Necessarily Competitive Views Are Useful
in Providing Additional Insights to Pakistan’s Energy
Challenges.

The Main Departures of the Economic Approach Developed
Here Incorporate the Following Aspects:

The Need to Account for the Fact that Pakistan’s Economic
Performance Has Been Cyclical Rather Than Sustained.

How Do Energy Availabilities and Production Affect Economic
Growth and Vice Versa?

How Do Key Interrelationships Between the Various Types of
Energy Affect that Sector’s Demand and Supply Over Time?

How do Different Oil Price Scenarios Change the Picture for
Future Energy Balances?
Energy and Economy –
Relevant Historical Patterns

1960s, 1980s and early 2000s Periods of Rapid
Economic Expansion. Other Periods Growth Flat.
Reasons to Doubt the Sustainability of the Current
Expansion – Lagging Investment, low savings, many
structural impediments remain.

Overall Energy Use Reflects These Patterns.

A Number of Long-Run Stable Relationships Between
Energy and the Economy.


Both Supply and Demand Exhibit a Number of Stable
Complementary and Competitive Patterns Between
Different Sources of Energy.
Adverse Developments in Electricity -- shift from Hydro
Generation to Oil and Coal, Shift in use from Industry to
Households. Low Rates of Capital Formation in Energy.
Energy and The Economy –
Empirical Studies



Growing Number of Studies Identifying Links Between
Pakistani Economy and Energy Use.
Energy Use and Economic Growth Interrelated – Energy
Expansion Leads to Growth. Impact Varies by Type of
Energy.
Investment and Infrastructure Lead to Expansion of
Energy Output. In Turn, Expanded Energy Production
Leads to Further Increases in Investment and
Infrastructure.

Evidence that Links Between Energy Availability and the
Economy May be Strengthening.

These Relationships Create and Environment Prone to
Vicious and Virtuous Circles of Expansion or Contraction.
The Macro-Energy Forecasting Model

Draws on Previous Empirical Research.

Expanded Per Capita GDP Function of Energy Availability
and Capital Formation.

Statistically, Gas, Coal and Hydro Generation Have
Strongest Links to GDP Per Capita.



Average World Oil Price Times the Rupee Dollar
Exchange Rate Statistically Significant in a Number of
Energy Supply/Demand Cases.
Links Investment and Infrastructure to Energy Supply.
Incorporates Number of Energy Complementarities and
Competitive Relationships Between the Various Types of
Energy.
Macro-Energy Forecasting
Model – Main Stages
St age 3
Supply:
Domestic
Energy
Production
Infrast ruct ure
Const raint
World Oil
Prices/
Rupee
Exchange
Rat e
Energy
Availabilit y
Gross
Capit al
Format ion
Supply
Trade-offs
GDP
Per
Capit a
Per Capit a
Consumpt ion,
Invest ment
Demand:
Commercial
Energy
Consumpt ion
St age 2
St age 1
Subst itut ion and
Complement arit ies
Fut ure
Energy
Balances
St age 4
Main Scenarios I

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
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Constructed on Different Assumptions
Concerning Investment and Gas, Coal and
Hydro Availability.
Model 1 – Base Line Forecast – Energy and
Investment 3% to 2035.
Model 2 – Continuation of Historical Cyclical
Pattern of Growth. Capital Formation
Alternates Between 2 & 4%. Gas Availability
7%, 10%, Coal, 4%, 11%, Hydro, 6%, 4%.
Model 3. Model 2 With No Major Expansion of
Dams and Hydro Power – Hydro Expands 3%
per Annum.
Main Scenarios II



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Model 4. High Investment Led Growth –
Investment Increases 6% Per Annum to 2035,
Gas 7% Coal 5% Hydro As in Model 2.
Model 5. Private Sector Led Growth –
Historical Pattern Investment, Hydro, Gas 7%,
Coal 5%.
Model 6 Expanded Dam Construction –
Acceleration Investment 6%, Gas 3%, Coal
3%, Hydro Accelerates, 5%, 7%, 9% 11%.
Model 7, Coal, Gas, Led Energy Expansion –
Availabilities 7% -- Investment, Historical
Pattern, Hydro, 3%.
Stage 1:
GDP Per Capita Growth Rates
Average Annual Growth
2005-2009
2010-2019
2020-2029
2030-2035
__________________________________________________________________________________________________
1. Base Line
3.34
2.09
2.34
2.44
2. Historical Cyclical Pattern
6.11
3.84
6.67
4.90
3. Historical Cyclical -- Lagging Hydro
5.53
3.39
6.16
4.56
4. Investment Led Growth -- Energy Lag
5.03
4.08
5.00
5.09
5. Normal Investment/Hydro -- Low Coal, Gas4.93
3.66
4.85
4.70
6. High Investment/Hydro Strategy
4.05
3.85
5.56
7.37
7. Moderate Emphasis on Coal and Gas
4.56
3.54
4.54
4.79
Stage 2: Energy Consumption

Main Findings:

Competitive Relationship Between
Oil/Petroleum and Gas.

Other Fuels Do Not Appear to Compete With
Electricity.

Expanded Oil/Petroleum Consumption Has
Sharply Reduced Coal Consumption.

Increased World Oil Prices Strongly Stimulate
Consumption of Gas and Coal With a Weaker
Effect on Electricity -- Little Impact on
Oil/Petroleum Consumption.
Stage 3: Energy Production

The Main Energy Supply Trade-Offs –
Petroleum Products Adversely affected by
Expanded Electricity,

Expanded Thermal Electricity Weak Adverse
Affect on Coal Production.

Increased Coal Production Strongly Associated
with Higher Level of Thermal Electricity.

Infrastructure Constraints Mainly Associated
with Thermal Electricity.

Increased World Oil Prices Stimulate Gas
Production and Thermal Electricity Capacity.
Stage 4: Energy SupplyDemand Balances Model 1


Model 1 – Low Growth. With Increasing World
Oil Prices:
Gas Supplies Expand Well Below Demand to
2030. Coal Demand Outruns Supply After 2010
Becoming Severe in the 2020s.

Demand For Electricity Outruns Supply 20102020 and after 2030.

Shortfall in Petroleum Products Particularly
Severe to 2010.

With Rising Oil Prices Demand and Supply
Gaps Reduced in Most Cases.
Stage 4: Energy SupplyDemand Balances Model 2

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Historical/Cyclical Pattern of Growth:
With falling world oil prices, domestic gas lags
considerably behind demand up to 2030. Electricity –
severe shortfalls between 2010 and 2020. After 2010
coal supplies begin to lag demand. Severe shortfall
petroleum products until 2010.
Rising world oil prices: gas supplies improve but
demand strengthens – shortfall to 2035. Severe
electricity shortfalls in the 2020s.
Coal supplies and demand roughly balance over the
forecast period. Petroleum products fluctuate between
severe shortages in initial years in balance to 2020 with
demand outrunning supply in the 2020s.
Stage 4: Energy Supply-Demand
Balances: Other Models

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Several Basic Patterns Emerge:
Rising World Oil Prices Through Encouraging Expanded
Domestic Supplies is a more Conducive Environment for
Attaining Energy Balance Than One of Falling Prices.
High Growth Does not Necessarily Worsen Energy
Balances – In Many Cases High Growth is Consistent
with Improved Energy Balances.
If Immediate Gains in Energy and Growth are Not
Required, Strategies favoring Hydro Power are Generally
Superior in Achieving a Long Run Stable Growth Path.
These Patterns Suggest that the Links Between Energy
and the Economy are Not Simple Linear Functions.
Rather their Interrelationship Creates an Environment
Conducive to Vicious and Virtuous Circles.
Generalizations From the Model Results:
Possibility of Virtuous Circles
Expanded
Supplies of
Coal, Gas,
Electricity
Reduce
Balance of
Payments
Difficulties
Increasing
World Oil
Prices
Demand
Shift to Gas,
Coal
Electricity
Improving
Energy
Situation
Stimulates
Economy
Expanded
Public
Investment,
Infrastructur e
Investment
in Energy
More
Profitable
Further
Expansion
of the
Economy
and Energy
Sector
Expanded
Private
Investment
Including
Direct
Foreign
Investment
Generalizations From the Model Results:
Possibility of Vicious Circles
Slow
Expansion of
Domestic
Ener gy
Increases
Impor t
Dependence,
Exasperating
Balance of
Payments
Problems
Falling
World Oil
Prices
Demand
Slack ens for
Gas, Coal
Electricity
Deterior ating
Ener gy
Situation
Dampens
Economic
Growth
Public
Investment,
Infrastructure
Development
Slow
Expansion
of
Investment
in Ener gy
Slows
Further
Deceler ation
in Economic
Growth
Flat Rates of
Private
Investment,
Declining
Inflows of
Foreign
Investment
Final Observations



The Macro-Energy Forecasts Are Only An Initial
Attempt to Model Pakistan’s Energy/Growth
Patterns Over Time.
While Some Policy Implications Are Apparent –
Letting Prices Reflect the True Costs of Energy,
Great Caution Should Be Applied.
What Takes Place Outside the Energy Sector
May Have Just as Important Consequences for
the Country’s Energy Picture as those Policies
Directly Affecting the Sector.