Sunday, March 13, 2011

Relating Per Capita GDP to Petroleum Consumption and Exports for the MENA Countries

In a previous article, I reproduced a plot relating per capita oil consumption to per capita GDP for selected countries, from a presentation, Energy and the Economy, by Adam Sieminski, chief energy economist for Deutsche Bank.   Sieminski’s plot showed a linear correlation between per capita oil consumption and per capita GDP for a selection of countries from Europe, Asia, North and South America. No countries were selected from the MENA (Middle East and North Africa) countries, however.

In this article, I look at the MENA countries, that I recently surveyed, to test whether these countries show the same general trend of increasing GDP per capita with increasing petroleum consumption per capita.  Additionally, I also examine, for the first time, as best I can tell, the relationship between petroleum exports per capita and GDP per capita.  In both cases, I examined these relationships separately for the exporting and importing MENA countries. 

Why relating GDP to oil consumption and exports is important
In my previous article, I used Sieminski’s plot, and several others, to support my argument that oil consumption and standard of living (as approximated by GDP per capita) are tightly linked.  My thesis was that if a country’s oil consumption goes down (e.g., because domestic production declines, or, because there is less oil to import) then that country’s standard of living will go down more of less contemporaneously and proportionately. 

I acknowledge that an economic decline (decreases GDP per capita) may precede an oil consumption decline.  Or alternatively, decreasing oil consumption, because prices go up and therefore oil less available, or, because there is a disruption in exportable oil, could precede and contribute to an economic decline. I don’t see good evidence saying that one must always precede the other.   I do believe, however, that the time delay between the changes in these two parameters must be fairly short, otherwise we would not see the kind of linear relationships illustrated in Sieminski’s plot. 

If there is a linear relationship between GDP per capita and the rate of petroleum consumption per capita, and this is general to all countries and within countries, then, if I can estimate how much consumption will decline, then I can also estimate how much standard of living will decline.

GDP per capita and petroleum consumption raters per capita for the MENA countries
Figure 1 shows my calculation of petroleum consumption rates per capita versus GDP per capita using the 2009 data I collected for the 28 MENA countries examined in the two previous articles: Survey of Oil Exports from the Middle East and Survey of Oil Exports from North Africa.
There is a very wide range of data in this plot, so the data for several countries gets jammed together at the origin.  Figure 2 shows this detail region:

Overall, this plot suggests that the MENA countries have the same strong linear correlation as shown in Sieminski’s plot, between petroleum consumption per capita versus GDP per capita.

The black line shows the best fit linear regression line for all 28 countries (slope = 0.51; intercept = 2.8 bs/p), which has a regression coefficient (r2) equal to 0.77.  That is, 77% of the variation in petroleum consumption rates per capita can be explained by GDP per capita.  Or, 77% of the GDP per capita can be explained by petroleum consumption rates per capita. 

The slope of about 0.5 suggests to me that every ½ barrel of petroleum consumed per person corresponds to a change in GDP of about 1000 USD.  Or, 1000 USD worth of economic activity corresponds to the consumption of ½ barrel of petroleum. 

If I just consider the 15 petroleum exporter countries (green circles and line), then the best fit linear regression line is almost the same, although the intercept is slightly higher (slope = 0.48; intercept = 5.50; r2 = 0.74). 

The 13 importers also follow the same trend, although the slope and intercept is slightly lower (slope = 0.41; intercept = 1.1; r2 = 0.80). 

It is interesting to note that, compared to a number of the higher consumption rate per capita countries (i.e., Qatar, Kuwait and UAE), Saudi Arabia has a relatively lower GDP per capita.  That is, compared to these countries, Saudi Arabia consumes more petroleum at a rate that corresponds to a comparatively lower standard of living (GDP per capita).  I don’t know why that would be the case, but perhaps it is related to Saudi Arabia’s relatively higher population and larger geography area compared to Qatar, Kuwait and UAE. 

Israel has about the same level of petroleum consumption and GDP per capita as some developed European countries, and, Lebanon is not too far behind Israel.  Several of the North Africa countries with no petroleum production and very low consumption rates are all close to the origin with GDP per capita at or below 1000 USD.   I see these countries as representative of the standard of living we might expect to see for the MENA countries if they were all to become substantially non-petroleum based societies. 

Yemen, Sudan and Chad are net exporters, but, the GDP per capita of these three countires are all not much different from net importers like Mauritania, Palestine and West Sahara.  It would seem that Yemen, Sudan and Chad’s exports are insufficient in magnitude to make much difference in the GDP per capita.

Standing apart from the other exporter is Bahrain (circled in red).  Its GDP per capita of $40,000 is much higher than I would expect for a country with almost no net exports.  In the past, petroleum production and refining accounting for more than 60% of Bahrain's export receipts and 70% of government revenues.  Perhaps this high GDP per capita reflects income from refining.  However, with exports hitting zero right now, I wonder if this is not a “Wile E Coyote” moment for Bahrain, where consequences of no longer having income from petroleum export income has not yet effected the economy.

Tunisia, Egypt and Algeria are similar to Bahrain in that GDP per capita is relatively high for their petroleum consumption rates.  Egypt is a little bit ahead of Bahrain, having recently hit net zero exports, and Tunisia is still further ahead of Egypt, having hit net zero exports in the early 2000s (and actually a small net exporter once again).  Algeria looks a few decades out from hitting zero exports; in an earlier article I estimate that Algeria would reach zero-net exports by about 2029, although the trend for declining exports was underway now.  Still, it seems that Algeria’s GDP per capita is higher than I would expect based on its consumption rate per capita.  Perhaps its cushion of $150 billion in foreign currency reserves and hydrocarbon stabilization fund helps to mitigate the declining foreign income from declining exports. 

GDP per capita and petroleum consumption per capita for the MENA countries
Figure 3 shows my calculation of petroleum exports per capita versus GDP per capita using the same 2009 data for the 28 MENA countries. 

Figure 4 shows a detailed view of the data close to the origin.

The slopes of the linear regression best fits for the 15 exporting countries and 13 importing are quite different, although they both have high r2 values.

For the 15 exporter MENA countries, there is a strong positive correlation between the quantity of petroleum exported per capita and GDP more capita (slope = +3.4; intercept 0.2; r2 = 0.83).  This makes sense to me: the more petroleum exported, the greater the domestic income, and this translates into a greater standard of living.  The slope of 3.4 suggests that exporting 3.4 barrels of petroleum correlates with an increase the per capita GDP of about 1000 USD. 

Once again Bahrain stands apart from the group (if I omit Bahrain, from the regression analysis, r2 = 0.9, but the slope, 3.5, is not changed by much).  With essentially no exports but a very high GDP per capita, I wonder how long this high standard of living will last, if the present increasing consumption trend continues and Bahrain needs to import petroleum in the very near future.

In contrast to the exporters, for the 13 importer MENA countries, is a strong negative correlation between the quantity of petroleum imported per capita and GDP per capita (slope = -0.41; intercept  -0.68; r2 = 0.74).  This also makes sense: the more petroleum imported, the greater the domestic productivity, and this translates into a higher standard of living.  The slope of -0.4 suggests that importing 0.4 barrels of petroleum increases the per capita GDP by about $1000. 

I find the difference in the magnitudes of these two slopes: +3.4 versus -0.4 quite interesting.  An exporting country exports 3.4 barrels per capita and that corresponds to an increase in GDP per capita of 1000 USD.  But if an importing country can import 3.4 barrels per capita, that corresponds to an increase in GDP per capita of about 6600 USD (i.e., (6.5 * -0.41)–0.68 = 3.4. 

I was surprising to see that the corresponding increase in GDP per unit of imported petroleum is substantially greater per unit of petroleum exported.  Of course, that assumes that there is some source of income with which the petroleum can be purchased. 

Does a corollary of this result mean that, if a country can no longer afford to import, or, the petroleum is no longer available to import, then would the GDP per capita fall by the same amount?  For example, would the inability to import 3.4 barrels per capita mean that GDP per capita would correspondingly fall by -$6600 per capita?

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