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Finance & Development, December 1980
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Managing the demand for energy in the developing world: In addition to producing more energy, oil importing developing countries could use conservation to reduce oil imports

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1980
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Raymond Goodman

It is now generally accepted that the energy problem of the 1970s was no passing phenomenon but marked the end of an era of cheap coal and oil, and the transition to high-cost energy. In real terms the price of oil is now more than five times what it was in 1972, and seems likely to continue to rise. Now that energy is no longer cheap, it ranks in importance with the classical factors of production—land, labor, and capital—and its supply and cost must be given due weight in the plans of economic managers at all levels. These considerations apply not only to forms of energy that are traded internationally but also to energy that is produced and consumed domestically, and to traditional as well as commercial energy, because the prices, availability, and consumption levels of all forms of energy are closely related. Commercial energy includes coal, oil and natural gas, and electricity generated by burning one of these fuels, or obtained from hydroelectric, nuclear, or geothermal power. Traditional energy is derived from materials commonly used in preindustrial societies, such as wood, charcoal, agricultural residues, and animal or human wastes.

Developing countries consume a small share—12 per cent—of the world’s commercial energy. However, their economies are growing faster than those of the industrial countries, and the rapid growth of cities, industries, motorized transport, and other energy-intensive developments, has in the past caused their demand for commercial energy to grow faster than their gross national product (GNP). Much of the increased demand has been met by oil, and the great majority of developing countries must import all or a portion of their oil requirements (see Tables 1 and 2).

Table 1Developing countries: primary commercial energy balances, 1980 and 1990(In millions of barrels a day of oil equivalent)
19801990
Less developedOil importingLess developedOil importing
countriesdeveloping countriescountriesdeveloping countries
ProductionConsumptionProductionConsumptionProductionConsumptionProductionConsumption
Oil13.29.22.06.519.415.43.6111.4
Gas3.02.11.51.45.23.02.62.6
Coal2.52.62.42.53.73.83.33.4
Hydro1.91.91.51.54.14.13.23.2
Nuclear0.10.10.10.11.21.21.01.0
Other20.30.80.30.41.93.11.51.2
Total21.016.77.812.435.530.615.222.8
Sources: World Development Report, 1980 and Bank staff estimates.

Production level projected in Case 1. The production level in Case 2 is 4.8 million barrels a day of oil.

Includes alcohol, other nonconventional primary energy sources, unallocated energy, and exports of gas.

Sources: World Development Report, 1980 and Bank staff estimates.

Production level projected in Case 1. The production level in Case 2 is 4.8 million barrels a day of oil.

Includes alcohol, other nonconventional primary energy sources, unallocated energy, and exports of gas.

Table 2Oil importing developing countries: oil Imports, 1970-90
1990
1970197519801985Case 11Case 22Case 33
Net Imports4
(In millions of barrels a day)1.84.44.56.07.66.45.5
Cost of Imports5
(In billions of 1980 U.S. dollars)5.431.549.376.6111.093.480.3
Middle-income countries4.227.943.867.799.384.672.7
Low-income countries1.23.65.58.911.78.87.6
Source: World Bank staff estimates.

Assumes a cotinuation of present trends of production and consumption.

Assumes oil production Increases to 4.8 million barrels a day of oil by 1990.

Assumes Case 2 production levels backed by vigorous demand management.

Includes oil used as fuel as well as lubricants. feedstock for fertilizer and petrochemicals, and other Industrial uses. Fuel use typically accounts for 90 per cent of the total.

Average costs per barrel, 1970 and 1975. in 1980 dollars. 1960 price is $30 per barrel, assumed to increase at 3 per cent a year in real terms.

Source: World Bank staff estimates.

Assumes a cotinuation of present trends of production and consumption.

Assumes oil production Increases to 4.8 million barrels a day of oil by 1990.

Assumes Case 2 production levels backed by vigorous demand management.

Includes oil used as fuel as well as lubricants. feedstock for fertilizer and petrochemicals, and other Industrial uses. Fuel use typically accounts for 90 per cent of the total.

Average costs per barrel, 1970 and 1975. in 1980 dollars. 1960 price is $30 per barrel, assumed to increase at 3 per cent a year in real terms.

This article is based on a more detailed report onEnergy in the Developing Countries(August 1980), available from the World Bank.

The oil importing developing countries face severe problems in maintaining their economic progress in view of the higher cost of energy. As well as having to adapt their long-term investment plans, many of them are finding acute difficulty in financing their present imports of petroleum, which this year will cost nearly US$50 billion. Unless a major effort is made to reduce dependence on oil imports, the cost (in constant dollars) is expected to more than double by 1990 (see Table 2). Commercial energy consumption in these countries is projected to grow from 12.4 million barrels of oil equivalent per day in 1980 to 22.8 million barrels in 1990, while their production, based on present estimates, is expected to grow from 7.8 million barrels of oil equivalent per day to 15.2 million barrels (see Table 1). Unless this widening gap can be narrowed, economic growth will have to slow down.

However, rates of oil consumption and import growth could be significantly reduced if both energy production and conservation measures were carried out to their full potential. With a maximum effort to exploit their ultimate recoverable oil reserves (Case 2), oil importing developing countries could be producing an additional 1.2 million barrels a day by 1990, saving about $18 billion worth of imports (in 1980 dollars) as compared with the continuation of present trends (Case 1). The World Bank intends to help these countries achieve this higher level of petroleum production as well as increase their production of natural gas, coal, and other forms of domestic energy. (See the box for a review of its most recent energy program.) A major conservation effort could substantially increase these savings (Case 3). Even these massive efforts would still leave the oil importing developing countries with a larger real import bill in 1990 than they have now. However, the claim of oil imports on export earnings would be held at about the present level, namely, 25 per cent.

This article will discuss policies which would lead to a more efficient use of energy in the major consuming sectors of developing economies. Improving the efficiency of energy use means using each source of energy in such a way as to increase the value of energy output from a given volume of resources, and reducing waste in each energy using activity. At the national level this means setting priorities among the principal uses of energy—for example, industrial versus commercial or household activities, public versus private transport, energy-intensive versus non-energy intensive activities—and ensuring that government policies generally are consistent with these priorities. Energy efficiency must be considered as a principal element of economic planning, and energy demand management must take its place with other forms of economic management.

Conservation policies

In most countries the distribution of energy among the principal uses has been influenced by taxes, subsidies, price controls, and other forms of regulation to ensure different prices for particular uses or types of consumer. An essential tool in most countries, developing and industrial, for increasing energy efficiency is a pricing policy which ensures that, as far as possible, the price of energy in various uses reflects its real economic cost. For most energy products this means the opportunity cost, that is, the highest price for which these products could be sold elsewhere, or the cost of an equivalent amount of energy in another form, for example, oil delivered to the site. It is only when the product cannot be traded, or cannot be substituted for another energy product which is traded, that its economic price is its cost of production or replacement. In many cases, the economic pricing of energy products requires either the removal of inappropriate government-imposed pricing restrictions or adjustments in government policies.

A government can tax some or all energy products to encourage conservation or the substitution of other fuels. Where uncertainties exist in the supply of energy from abroad, a government may also allow a premium over economic prices in assessing the viability of developing indigenous energy resources. Governments can also use a variety of nonprice controls, such as import restrictions, rationing or quotas, for selective short-term intervention in the market for certain energy and energy-related products, while fundamental price adjustments are being made. Finally, it may be necessary to impose on government agencies, which are often insensitive to—or insulated from—market forces, various forms of budgeting or rationing to ensure that the energy consumed in public projects and services also reflects its real cost. Administrative and pricing policies need to be backed by education programs for the general public and for particular kinds of energy consumers, to help overcome political resistance to realistic prices for energy and to inform them of available technologies. Training in good energy practices should be encouraged for all who operate equipment that produces or consumes energy.

The energy situation and programs for demand management vary widely among countries. But in spite of the varying uses to which different types of energy are put in the developing world, and the uneven potential for conservation, there are some issues which are generally relevant for policymaking everywhere. The following sections discuss the potential for energy conservation in the main energy using sectors—private households, industry, and transport. Substantial improvements in efficiency are also possible in the generation, transmission, and distribution of electricity. Agriculture is not a major consumer of energy (typically accounting for about 5 per cent of commercial energy consumption) and it is therefore not discussed in this article. However, careful management of energy demand in the sector will be needed to sustain yield increases during a period when the cost of petroleum-based fertilizers and other chemicals is likely to rise faster than the prices of basic foodstuffs.

World Bank energy program

Beginning early in 1979 the World Bank adopted an accelerated program for fossil fuel development in response to the urgent need of developing countries to exploit as fully as possible their domestic energy resources. The program included for the first time financing of exploration as well as production. Since the inception of the program the Bank has financed 18 petroleum projects in 16 developing countries; lending for petroleum in fiscal years 1979-81 (ending June 30) will amount to US$1,350 million and an additional $300 million will be lent for coal projects. Based on this experience, a larger program is planned for fiscal years 1981-85, but even this will be far short of the need. The possibility is therefore being explored of establishing a new energy affiliate of the Bank, with separate financing, which would permit an even larger program to be mounted.

Lending for the generation, transmission, and distribution of electric power, which has always formed a large part of the Bank’s total program, increased substantially in fiscal year 1980 to $2,392 million, about twice the average of the previous two fiscal years. In view of the high and rising price of oil, power projects have shifted increasingly from oil-fired to coalfired and hydroelectric plants. In fiscal year 1980 alone the Bank financed almost 5,000 megawatts of new hydropower capacity, and no oil-fired thermal plants at all. Cofinancing is a feature of electric power projects, especially the larger ones, and provides additional financing for a sector to which the Bank, despite its considerable program, contributes only a small share of the total investment.

The current program for FY 1981-85

World Bank lending for energy (including IBRD loans and IDA credits) during the next five years is planned at a level of some $13 billion, about 17 per cent of total Bank lending during the period. Electric power accounts for about 58 per cent of the total, a substantially smaller share than in earlier years. The biggest increase is planned for oil and natural gas projects—almost $4 billion—but there will be a substantial increase in lending for coal and lignite projects which are expected to require $840 million during the five years. Renewable energy resources in the form of fuel wood planting programs and the production of ethyl alcohol from agricultural materials account for most of the balance.

The total cost of the projects to be financed in part by the Bank is expected to exceed $557 billion. When completed, they will produce (or save) energy equivalent to about 1.6 million barrels of oil a day, over 5 per cent of the projected consumption of commercial energy by the developing countries in 1990.

A larger program

The World Bank is by far the largest public source of support for energy development in the developing countries, but its financial contribution falls a long way short of the investment needs of its members. A much larger lending program is both desirable and feasible. An additional $12 billion of lending in fiscal years 1981-85 would be justified, for a total program of $25 billion during that period. The total cost of projects financed under such a program would amount to about $92 billion; on completion these projects would produce (or save) energy equivalent to 2.9 million barrels of oil a day, or 9.5 per cent of the projected consumption by the developing countries in 1990. This desirable program, and the Bank’s current program for fiscal years 1981-85, are summarized in the table. Since the Bank would be unable to finance the desirable program without displacing projects in other important sectors, the possibility of establishing a new energy affiliate of the Bank, with substantial resources of its own, is being actively explored.

Projects that would permit a doubling of the present provision for oil and gas development (about $4 billion) have been tentatively identified. About 30 per cent would be for geological surveys, exploratory drilling, and other predevelopment work, and the rest for production facilities. The additional lending for coal, including exploration and project preparation, would permit a near doubling of output in the developing countries by 1990. Electric power projects requiring an additional $3.5 billion (for total lending of $11 billion) have been identified. The larger program would enable the Bank to more than double its lending for fuel wood projects—one of the most urgent needs in Africa and in the poorer countries in other regions—to expand work on alcohol production from biomass, and to help member countries make better use of their energy resources by building or improving oil refineries, and investing in energy saving devices and more efficient processes in industry (for example, retrofitting).

Under both the current and the desirable programs, the Bank would assist the oil importing developing countries in drawing up national energy plans and in strengthening institutions in the energy sector. An expanded program of energy sector reviews is planned, and by the end of the five-year period virtually all 60 countries believed to be in need of such assistance will have been covered.

Current and desirable World Bank energy lending programs, fiscal years 1981-85(In millions of current U.S. dollars)
CurrentDesirable
Lending

program
Total project

cost
Lending

program
Total protect

cost
Coal and lignite18404,2702,0007,350
Oil and gas
Predevelopment1,0202,6102,4105,850
Oil development21,7555,9003,32012,150
Gas development31,2103,2502,2705,875
3,98511,7608,00023,875
Refineries1504001,0003,100
Renewables
Fuel wood4258501,1002,200
Alcohol2002,1006504,550
6252,9501,7506,750
Electric power7,59037,95011,00047,450
Industrial retrofitting1,2503,825
Total13,190457,33025,000492,350
Bank share of total cost
(in per cent)2327
Source: World Bank.

Includes coal gasification projects.

Includes heavy oil project.

Includes methanol.

Does not provide for any lending to China.

Source: World Bank.

Includes coal gasification projects.

Includes heavy oil project.

Includes methanol.

Does not provide for any lending to China.

Households account for an average of about 45 per cent of the developing countries’ total energy consumption, but only 10–20 per cent of their commercial energy consumption. In low-income countries, these shares are 75 per cent and 10 per cent, respectively, and in middle-income countries, they are 20–40 per cent and 10–20 per cent, respectively. Much of the noncommercial energy consumed by households has limited marketability. Households in developing countries use energy mainly for cooking. Space heating and cooling become significant only at the upper-income levels, except in countries such as Korea and Turkey which have severe winters. (In the United States, by contrast, the heating and cooling of residential buildings alone accounts for 22.5 per cent of total energy consumption.)

Firewood, charcoal, crop residues, and animal dung account for virtually all of the energy used in many rural areas and for about 25 per cent of total energy consumption in developing countries. Africa is most dependent, Asia somewhat less, and Latin America least dependent on such sources. About two billion people, or about 75 per cent of the population of the developing countries^ presently use traditional fuels for cooking.

As a result, developing countries have been consuming their wood supplies far more rapidly than they can be renewed, with grave environmental, social, and economic consequences. Resolving this problem by encouraging a shift to commercial fuels would simply increase the import bill. On the other hand, the availability of traditional fuels in most developing countries complicates the problem of charging cost-based prices for commercial fuels. In many developing countries townspeople use wood or charcoal for cooking, and in the countryside these fuels may appear to be a free good. Thus, raising the price of commercial fuels to limit the growth of demand for them will make traditional fuels more attractive, adding to the pressures on forests. In fact, the poverty of both rural and urban households has meant that many governments subsidize kerosene and provide “life-line” electricity tariffs to ensure a minimum supply for poor people at a price they can afford. However, it is difficult to confine these benefits to consumers who really need them. Moreover, subsidies discourage efforts to find alternatives, including the planting of more trees.

Governments in these countries, therefore, face exceedingly difficult choices in preserving their natural resources and promoting the more efficient use of energy in households. Promoting the use of improved cooking stoves, for which simple designs exist, would help considerably, as would the exploitation of agricultural wastes to provide liquid or gaseous fuels and other renewable energy devices. Opportunities for constructing small hydroelectric plants also exist in many places. Specific measures to address the energy needs of rural households need to be conceived as part of a rural development strategy that includes systematic reforestation and the planting of trees on marginal land in cultivated areas.

Industry

Industry is a major user of commercial energy in the developing world. In the countries for which data are available, the industrial sector accounts for one fifth to two thirds of total commercial energy consumption, with an average probably at around 35 per cent. Of the developing market economies’ total consumption of commercial energy and liquid fuels in 1978, 14 countries accounted for 70 per cent and 65 per cent, respectively. (The addition of China, Romania, and Yugoslavia brings these ratios up to 85 per cent and 73 per cent.)

The potential for improved energy efficiency in industry varies among countries according to energy costs and pricing policies. Conservation programs may call for broad policy changes in energy pricing, fiscal incentives for energy saving investments, government-supported technical assistance programs, and the provision of financing on attractive terms. World Bank experience with industrial projects in developing countries indicates that significant energy savings can be achieved within two or three years by improved and efficient management, personnel training in maintenance, and relatively simple changes and improvements in existing production processes, such as the recovery of byproducts or the installation of waste heat boilers, better insulation, and better bearings. Further energy saving measures (often known as retrofitting) involving somewhat more investment in energy saving devices, more efficient processes, a different type of boiler, and so on, are often unique to the processes in the industry or plant concerned. (Examples include coke plant dry quenching or improved preparation of raw materials in the steel industry.)

A combined program of more efficient management and changes in equipment and processes might enable the developing countries to reduce their energy consumption per unit of industrial output by 10 per cent by 1985 and 15 per cent by 1990. For oil importing developing countries, assuming that the industrial sector will account for 35 per cent of their total commercial energy consumption., this would imply energy savings equivalent to about 1.3 million barrels a day of oil in 1990, reducing their oil import bill in that year by about $19 billion (in 1980 dollars) or over 17 per cent.

Policies toward industrial development need to take account of the higher direct cost of energy in industrial production (now 20–35 per cent of total product cost in steel, 30–35 per cent in cement, and 40–50 per cent in ammonia, for example). This does not imply that developing countries should necessarily move away from investments in energy-intensive industries. Considerations other than energy, such as the comparative advantage conferred by natural resources, the extent of value added, the size of the domestic market, and the indirect costs of energy as an element in transport costs, will obviously continue to be important and their implications included in the evaluation of particular industries or industrial processes.

Electric power

The use of electric power has grown along with the development process, at a rate of 10 per cent a year from 1950 to 1974, and 8 per cent a year since then. The growth in power consumption is projected to continue at an annual rate of 8-9 per cent during the 1980s. A continually greater proportion of developing countries’ commercial primary energy consumption has been for the production of electricity: until the 1950s this share was 10 per cent, and by 1980 it had reached 25 per cent. Conservative projections indicate that it will surpass 30 per cent by 1990.

Worldwide, utilities have made a dramatic shift in policy away from the use of fuel oil to coal and gas. Nevertheless, in 1980, developing countries will use nearly 1.5 million barrels of oil a day, at a cost of around $16 billion, to generate electric power. Their oil consumption for generating electricity is projected to increase to over two million barrels a day at a cost of $30 billion (in 1980 dollars) in 1990.

Most developing countries urgently need to increase the efficiency of their energy use in electric power generation, transmission, and distribution. All power systems inherently incur energy losses in generating stations, and resistance losses in transmission and distribution networks. More efficient operations and a reduction in losses might realistically reduce the requirement for new capacity in 1990 by 7 per cent, corresponding to a saving of $20 billion (in 1980 dollars); the potential fuel saving might be as much as $2 billion a year.

Substitution of fuels provides additional possibilities for reducing oil import requirements in the power sector, depending on the technical characteristics of the existing plants. The development of national and regional grids could also increase the efficiency of primary energy use in the developing countries. Large power systems permit economies; in thermal generation, for instance, larger unit sizes have lower capacity costs, greater efficiency, and cheaper maintenance requirements. Annual fuel savings resulting from larger integrated systems could be equivalent to about 12 million tons of oil by 1990.

Transport

In many low-income countries, transport accounts for only 10-20 per cent of total consumption of commercial energy, but its share is growing. (It accounts for 15-25 per cent of total direct energy use in industrial countries, and for a similar or slightly higher proportion in middle-income developing countries.) Road transport (cars, trucks, and buses) accounts for 70-85 per cent of the energy directly consumed in the transport sector; rail and air transport typically consume about 3-5 per cent and 5-10 per cent, respectively. Except in a few countries where railways are still fueled by coal or are electrified, mainly on the basis of hydropower, the transport sector depends almost entirely on petroleum, and in many countries uses more than one half the total petroleum products consumed. Some countries, notably Brazil, have begun to use alcohol fuels produced from grains as motor fuel substitutes. Others, such as Korea, are experimenting with liquid propane gas-powered vehicles. Attempts to improve energy efficiency in the transport sector by such means as raising standards of vehicle operation and maintenance, especially public bus and truck fleets, improved traffic flow and control, driver training, and better road maintenance are therefore particularly desirable. Shifting freight traffic from road transport to coastal shipping, river, and rail systems, which are several times more energy efficient when heavily loaded, will also increase energy efficiency. For passenger transport, improvement of the public transport services would also help in diverting part of the traffic from private cars to more efficient bus or rail services.

Bank staff estimates suggest that total energy savings in the transport sector could be between 20 and 25 per cent. As the energy use in transport comes overwhelmingly from petroleum products, this represents potential savings of about one million barrels of oil a day at present levels of consumption, costing about $11 billion in 1980. Based on the estimated consumption and oil price in 1990, the potential savings in that year would be about $25 billion (in 1980 dollars). For the oil importing developing countries, even if only about one half of the potential savings were actually achieved, the 1990 oil import bill would be reduced by about 10 per cent.

Substantial benefits

Developing countries could achieve substantial benefits by a broad program of demand management designed to increase the efficiency of their use of energy. Their energy consumption in 1990, presently projected at 30.6 million barrels of oil equivalent a day, could be reduced by as much as 15 per cent by such a program. A summary of potential savings in the main economic sectors, based on Bank staff estimates derived from country, sector, and project analyses is given in Table 3. For the oil importing developing countries, even if only half the potential savings were achieved by 1990, oil imports in that year would be about $13 billion (in 1980 dollars) lower than they otherwise would be (compare Cases 2 and 3 in Table 2). Not only could some of the benefits be derived within a short time but many of the measures involved require little or no investment: one example is the removal of government price regulations which in many countries prevent the economic pricing of energy products. The greatest scope for curbing the growth of energy demand is in the industrial sector, which is a major consumer of electric power as well as of mineral fuels, mainly through the planning of industrial development, technical improvements in industrial processing, and retrofitting. Sizable energy savings could also be achieved in transport (particularly savings of oil), in the electric power industry, and in the household sector. Programs of this kind call sometimes for difficult political decisions on the part of governments, as well as administrative and technical skills which are very scarce in many of the developing countries. This is an area where the international community, including both aid agencies and private industry, could be particularly helpful.

Table 3Developing countries: potential savings in commercial energy consumption, 1990(In millions of barrels a day of oil equivalent)
Savings from
Projected

consumption1
Pricing

policies
Taxes and

regulations
Retrofitting and

technical

improvements
Interfuel

substitution

and

scale economies
Total

reduction
Electric power26.50.10.50.10.7
Agriculture1.5(.)0.1(.)0.1
Households5.90.30.10.10.40.9
Transport7.50.10.10.60.21.0
Industry8.70.20.21.10.31.8
Other0.50.10.1
Total30.60.80.42.41.04.63
Source: World Bank staff estimates.(.) Less than 0.06 million barrels a day of oil equivalent.

Based on “High Case” projections of GNP and 3 per cent yearly increases in oil prices as used in World Development Report, 1980; a ratio of energy consumption to GNP growth of 1:1.2; and a price elasticity of energy consumption of −0.3 per cent.

Includes electric energy consumed in generation, station use, losses in transmission, and distribution. Electrical energy (based on thermal value) is distributed among the various sectors in the table.

Potential savings for oil importing developing countries would be 3.4 million barrels a day of oil equivalent.

Source: World Bank staff estimates.(.) Less than 0.06 million barrels a day of oil equivalent.

Based on “High Case” projections of GNP and 3 per cent yearly increases in oil prices as used in World Development Report, 1980; a ratio of energy consumption to GNP growth of 1:1.2; and a price elasticity of energy consumption of −0.3 per cent.

Includes electric energy consumed in generation, station use, losses in transmission, and distribution. Electrical energy (based on thermal value) is distributed among the various sectors in the table.

Potential savings for oil importing developing countries would be 3.4 million barrels a day of oil equivalent.

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