Can Global Energy Consumption Stabilize On Its Own? (The answer may surprise you!)

            As a nation we fear higher oil prices, and we should! Energy is the foundation of our society.  One element of price fluctuations (and a source of potential anxiety) is the variance in global consumption. Each market uses energy to create goods and services all across the globe.  So every time a country builds and grows markets, there is increased demand for energy. The most clear example is China recent surge in demand for automobiles. 

Once might assume that as counties such as China and others in Africa start to develop and build more markets that the energy consumption will destabilize. After all, with so many different markets the potential swings from quarter to quarter activities could become tremendous.

This view of the world however is false. Baring extreme circumstances like an embargo or war, the reality is that energy consumption will increase, but the variance in that consumption will stabilize. The reason can be found in modern portfolio theory in finance. A good conservative portfolio has many different securities. Many of which are interconnected in risk and reward.  In other words, they are correlated, either positively or negatively if at all. Like corporate stocks, markets with their respective energy consumption can be correlated to some extent.  For instance, if companies use more motor oil to better power machines and build more bikes, kids will buy more bike oil to keep those bikes operating.  

One way to get in the thinking is to imagine a computer that picks random numbers from a bell curve.  If you just ask the computer to spite out a two or three observations, it may look unstable with just a few extreme results. But, if you ask the computer to spite out 10 million observations, the bell curve will form nicely. The same is true for the energy market.   

If we think of global energy consumption as our “portfolio”, as more and more markets emerge and start producing goods and consuming energy, the variance in energy consumption that effects the huge proportions of the energy market will effect the variance. This known as systemic risk.

To see if this prediction holds any water, lets directly compare the prediction to the data.  looking at the data from the world bank development indicators, since 1970, the variance in global energy consumption per capita appears to have fallen.
            Note that all this is before supply and demand for energy is considered. But developing markets themselves act as a stabilizing force, if and only if we can continue to find new ways to meet the next generation of energy demand.