China’s Blackouts Are Shining Light On A New Problem

over the past three weeks the second largest economy in the world has been subject to rolling blackouts with more than half of all chinese provinces now been subject to strict power rations businesses are being forced to close early factories have been told to reduce output and even bare essentials like traffic lights and elevators are going out with little to no warning causing all manner of chaos in a country with a lot of traffic and a lot of high-rise buildings the real tragedy here is that all of this is simply a market failure there haven't been any natural disasters or conflicts which have destroyed electrical lines or shut down power plants in fact the country's capacity to produce and provide energy is the best it's ever been so there is something more going on here but regardless of root causes this could not have come at a worse time china was in the process of rebuilding its economy after the pandemic preparing to host the winter olympic games all while simultaneously fighting off the collapse of some of its largest companies even at the best of times power outages like this can be devastating because well for as long as economies have existed they have at their core been mechanisms that value energy almost above all else economic prosperity and by extension standards of living are highly correlated with access to energy so much so that some economists and scientists have theorized that energy might actually be the de facto currency of the future or maybe at the very least a really good store of value in many ways it almost is today but there are a few things we need to understand before we get into that so what is the fundamental reason behind the chinese blackouts what could this teach us about our modern global economy's relationship with energy and finally what can we learn from this issue when inevitably faced with our own energy challenges in the coming decades this video is brought to you by skillshare thanks to skillshare you can learn new skills like drawing cooking and even how not to suck at speaking australian a 12-minute course that i created to help you decipher the aussie lexicon here's a quick preview why does this australian tribe assign so many nicknames to common nouns words like brekkie chewie and stubby if all of this sounds intimidating don't worry together we will decipher the australian lexicon once and for all be one of the first 1 000 viewers to sign up with the link in the description box below to get a one month free trial of skillshare premium after signing up you'll gain instant and unlimited access to my course as well as thousands of other awesome courses again the link is in the video description below china's energy crisis actually started two years ago when the government rolled out reforms in an attempt to liberalise the energy industry in the nation up until that point the relationship between the energy plan operators and the grid operators was almost entirely dictated by the government the companies that ran the plants would produce a given amount of power and sell it to the grid operators for a set price and those grid operators would provide that energy to businesses and households for a slightly higher price turning themselves a profit now this might be a bit controversial but energy generation and distribution is actually one of those markets that does well for itself by having a few government controls put in place for a few reasons for starters it's a market prone to being monopolized the extremely high barriers of entry of building a power station or laying out an energy grid mean that only the largest companies in a given country could even consider making the investment necessary to compete with an existing provider it's also heavily dependent on land as a factor of production as with all products producing and supplying energy requires a certain combination of land labor and capital we have already seen that the capital requirements as in the power plants and the power lines are extremely significant but the land is perhaps even more of a hurdle to entering this market power lines take up a significant amount of space spread out all over suburbs and industrial centers and people naturally don't like them hanging around their homes either if bringing a competing energy source to market meant building out a competing energy grid then unsightly power lines substations and high voltage energy towers would be multiplied by two or if there's lots of competitors in the market it would be multiplied by however many companies have decided to build out their own infrastructure in order to compete for end user dollars despite this being very materially wasteful it's also comically unfeasible because just a dozen or so providers all of the usable land around urban areas would be taken up by a cobweb of competing energy lines it's for this reason that utilities like roads plumbing and electricity are subject to strict government regulations in many instances they are just totally government run but even when they are privatized they are normally sold to large companies with an equally large rulebook about what they are allowed to do coming with it this is exactly what has happened in china there are hundreds of power plants all over the country that are primarily coal-fired these energy plants sell their power to grid operators who are required by law to sell their energy for a preset price this pricing regulation means that grid operators who have an effective monopoly on energy distribution can't charge whatever they want for power in order to generate massive profits they instead have to charge this government mandated price which eliminates the problem of the monopoly's pricing power but it does cause another problem the energy grid can only reasonably purchase energy from the providers for a price lower than what they are allowed to sell it at so if for example the price of coal more than quadruples within 12 months then it's going to cost more to produce coal based electricity than these grid operators are allowed to sell it for so they just don't buy the electricity and the power stations don't produce it there are millions of homes and businesses across china right now that would be willing to pay a higher price for access to reliable electricity but due to regulations that's just not possible this issue has been compounded by ongoing trade tensions with australia who has historically been china's largest coal provider as well as a push by certain local authorities to actually reduce coal burning ahead of the 2022 winter olympics in an attempt to avoid smog which could make the country look bad on the world stage this is a very interesting issue with so many moving parts that it really is hard to see what will end up happening but i'm not actually bringing this up to talk about any fundamental issues or speculate on future problems within china i'm actually too scared to do that anymore you absolutely should not at all be investing in chinese equities in fact even for more seasoned investors the market for chinese companies is not exactly the promised land of double-digit annual returns you might think it is a few moments later chinese government crack down on so many components of the technology industry in china and what that ultimately means and how that plays out you know we saw didi down materially i don't know i don't know how how much deedee has a stake in the education let's look at perhaps the most pressing issue in the nation at the moment the real estate market in china is a multi-trillion dollar time bomb the company is the world's most indebted property developer with about 300 billion dollars worth of net debt at least its bonds are included in a number of indexes across asia it indirectly creates more than three million jobs why do i hate being right all the time all jokes aside though there really is nothing necessarily unique about china's situation we even saw similar issues last year in texas with their variable pricing models leaving millions without power and millions more with devastating energy bills in fact this is all perhaps a symptom of a much larger economic factor and that's the relationship between energy and prosperity when we are looking at indicators and predictors of economic well-being there are a few things that economists will turn to to paint a picture gdp per capita life expectancy educational attainment corruption and even combinations of these factors used to make things like the human development index but perhaps one of the strongest determinants of prosperity is access to energy if we look at a list of the countries that consume the most energy per capita it lines up almost perfectly with list of countries ranked by gdp per capita the same is true if you just look at aggregate numbers total energy consumption and total gdp tell a very similar story but this raises two important questions is this a case of richer countries naturally using more energy to power more luxurious lifestyles or is it that countries with more power naturally become richer and then whatever the answer to that question is how do you explain this china is using 7.5 million gigawatt hours of electricity per year which is almost a third of the world's total electricity usage and more than the next seven largest economies in the world combined despite this their economy is for now smaller than america's and certainly much smaller than all of these other economies combined so what's going on here is there some reason for this massive apparent inefficiency let's take america as a generic advanced economy its electricity usage is pretty evenly split into residential commercial and industrial there is also a tiny fraction of a percent which is used for transportation as in electric cars buses and trains but for now we can pretty much ignore that residential consumption is the largest share of this usage and it accounts for basically everything done within the home it also accounts for home-based businesses if for example you are running a computer to work from home or maybe even mining bitcoin in your basement these are supposed to count as commercial usage but the epa which created this report really does not have an effective way to track that so it just kind of bundled it into residential despite these outlying factors we can generally assume that this is the sector that is energy usage as a result of wealth rather than the sector that it is growing wealth if we want to look at energy usage that creates wealth we need to instead look at the commercial and industrial sectors and by the way if you are confused about the difference between the industrial sector and the commercial sector don't worry i was too basically the commercial sector is made up of office space shop fronts warehouses anything that goes into running a business that's not actually physically building a product when you think of the industrial sector just think of fed income factories refineries smelting plants and yes ironically enough even power stations as of 2020 the industrial sector accounts for less than a quarter of all electricity usage in the united states and it was a similar story even before the pandemic when we compare these to china we can see that 81 of their energy usage goes towards industry and just 8 and 12 percent go towards commercial and residential applications respectively now this might not come as a huge surprise most of you watching are well aware that china has a much larger industrial sector than the us except it doesn't really china's industrial sector had a nominal output of 4.7 trillion us dollars in 2017 whereas the us had a nominal industrial output of 3.6 trillion dollars in that same year if we reverse engineer the numbers a bit here we can find that china is using about 6 million gigawatt hours on industry while the us is using one million gigawatt hours on industry the upshot of that is that the us is almost five times more efficient at turning electricity into value so again what's going on here well the first thing of course is that china's data might not be super reliable almost every other country on this list got its energy production figures recorded by the eia which stands for the energy information administration an american organization tasked with collecting information on energy production and usage all over the world china instead elects to publish its own figures through the state council which is fine but they do put a bit of a political spin on what is supposed to be boring objective data china's electricity consumption a key barometer of economic activity maintained steady expansion in 2020 as the country ended a year with a solid economic recovery despite the ravaging covert 19 epidemic look it really is no way of knowing if this is accurate or not but the government knows energy usage is a very closely monitored statistic amongst decision makers around the world so it's not unrealistic to think that they might have massaged the numbers a bit something something the chocolate ration has always been 20 grams again make up your own mind on this one because your guess is as good as mine even if we ignore this issue the biggest reason for this apparent imbalance is something called purchasing power parody a dollar in china buys you a lot more than a dollar in the united states especially when it comes to manufactured goods and electricity if we balance this purchasing power then china's industrial output goes from being about 30 higher than america's to almost 200 percent higher than america's in effect they are genuinely making a lot more stuff than america is it's just that the stuff is worth a lot less in the chinese market this adjusted figure means that china does still use more electricity per dollar in manufacturing output than the us but not by much if we assume the actual electrical output figures are overstated by some degree they might genuinely be on parody now what all this means is that energy is really unique in the sense that it is both the chicken and the egg of economic wealth it is both useful for creating wealth and instrumental in determining wealth for that reason it can almost be thought of as the unrecognized global currency currencies are a way to store and use value in an efficient manner if you work a regular job you are trading the value of your time and your skills for money that money is effectively a way for you to store that value until you use it to purchase a good or service which in theory should be equal in value to what you contributed to your employer i know that very broad definition might make a few people angry but that's the theory now money can take a lot of forms gold coins digits on a computer paper rectangles seashells it really doesn't matter so long as people agree it has value now that value can be very abstract i'm sure there are some of you watching that will say that fiat currency which is by far the most common currency used around the world today doesn't truly have value those same viewers might advocate for a return to the gold standard because gold is a little bit more tangible as a store of value especially since it can't just be created out of thin air but even gold drives a majority of its value from people believing it has value sure it's rare and it's a great conductor and it looks kind of pretty but it's just a metal being stuck on a desert island with a gold brick is just as bad as being stuck on an island with a wad of cash and actually a quick side note is that gold scarcity is actually a major problem when trying to use it as a currency most economies around the world today try to target a low level of inflation of around one to three percent depending on the central bank they do this so people are motivated to either invest or spend their money which stimulates the economy if a finite resource like gold was used as a currency then a lot of people would just choose to sit on it knowing that the economy will grow but the supply of money won't making their holdings more valuable every year this stagnation would stifle economic growth which is why most economists see moderate inflation as preferable to deflation anyway all of this is to say that gold is not much better than paper rectangles when it comes to being a store of true value or a currency they both depend almost entirely on people agreeing they have value this is where energy is different it really does have value both in the sense that it can be used to make other things a value and because it can be used to improve your own quality of life not just humans but all life as we know it has valued energy above almost everything else trees reach for the sun to conduct photosynthesis lions hunt zebra to feed on their calories and humans fight entire wars over access to oil fields an economy that just prints lots of money isn't necessarily rich and even all the gold in the world doesn't mean much unless it can be traded for something else just ask midas but an economy that can produce lots of energy is simply wealthy not enough water oh well just use desalination plants no natural resources that's fine just import them then use your limitless supply of energy to transform those raw materials into a value-added product export that product back at a markup and then import even more raw materials this is actually basically what iceland does today to a less extreme degree so if you want to learn about how this plays out in reality go and watch that video after this one economics is a study of scarcity and theoretically any economic problem can be solved with unlimited energy what's more is that sure energy can't be created or destroyed but it can be transformed into more useful forms almost endlessly someone sitting on their life savings of kilowatt hours is likely to see the value of those savings decrease over time as an economy increases its capacity to generate energy in usable forms of course if this energy-based currency was to become a reality we wouldn't be walking around with pockets full of batteries we would likely do what we did with gold back in the day and trade in bills denoting a set value of energy that would be stored somewhere which is better equipped to house it like a battery bank anyway is this likely to be adopted of course not at least not the immediate future but understanding this relationship between wealth and energy can actually be a very insightful way of viewing global economic events at almost any scale the author and economist vaclav smile does this in a number of his books and i definitely suggest checking them out if this was at all interesting to you he goes into much more detail and can obviously address much more nuance than as possible in a 20 minute video but even still thinking of energy as a true store of value can make issues like what is happening in china at the moment much easier to break down and understand it can also be useful on a smaller scale if you're looking for a business idea don't think of a better way to make or save money think of a better way to make and save energy in the long run it's going to be more valuable now of course to do that you're going to need to know something about thermodynamics or battery technology or maybe even workflow optimization fortunately you can learn all of these things with skillshare thanks to skillshare you can master virtually any skill you can think of before signing up i could barely draw a stickman figure but after watching a couple of helpful courses my illustration skills have improved dramatically if drawing isn't your thing skillshare offers a wide array of courses on lots of other topics from cooking to coding you name it skillshare has you covered if you're interested in becoming an actor or actress but don't know how to pull off a convincing australian accent fear not because you can learn right now thanks to my mini course on how not to suck at speaking australian pause the video right now and be one of the first 1 000 viewers to get one month of free skillshare premium by signing up using the link in the description below as always thanks for watching mate bye

Channel: Economics Explained

Views: 1,514,977

Keywords: china, china debt crisis, china debt problem, china debt default, china debt trap, chinese debt crisis, china housing market, china housing bubble, china debt bubble, china housing price index, china debt crisis explained, china economy, economy of china, china blackout, china energy crisis, energy crisis explained, china blacout, blackout in china, renewable energy, china australia trade war, china trade war, china coal, economics, economics explained

Id: dcIQdlud88c

Length: 18min 58sec (1138 seconds)

Published: Tue Oct 26 2021

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