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China鈥檚 Blackouts Are Shining Light On A New Problem | Economics Explained - YouTube
Channel: Economics Explained
[0]
over the past three weeks the second
[1]
largest economy in the world has been
[3]
subject to Rolling blackouts with more
[5]
than half of all Chinese provinces and
[7]
now been subject to strict power rations
[10]
businesses are being forced to close
[12]
early factories have been told to reduce
[14]
output and even Bare Essentials like
[16]
traffic lights and elevators are going
[18]
out with little to no warning causing
[20]
all manner of Chaos in a country with a
[22]
lot of traffic and a lot of high-rise
[23]
buildings the real tragedy here is that
[26]
all of this is simply a market failure
[29]
there haven't been any natural disasters
[31]
or conflicts which have destroyed
[32]
electrical lines or shut down power
[34]
plants in fact the country's capacity to
[36]
produce and provide energy is the best
[38]
it's ever been so there is something
[40]
more going on here but regardless of
[43]
root causes this could not have come at
[45]
a worse time China was in the process of
[48]
rebuilding its economy after the
[49]
pandemic preparing to host the Winter
[51]
Olympic Games all while simultaneously
[53]
fighting off the collapse of some of its
[55]
largest companies even at the best of
[57]
times power outages like this can be
[60]
devastating because well for as long as
[62]
economies have existed they have at
[64]
their core been mechanisms that value
[66]
energy almost Above All Else economic
[69]
prosperity and by extension standards of
[71]
living are highly correlated with access
[73]
to energy so much so that some
[75]
economists and scientists have theorized
[77]
that energy might actually be the de
[79]
facto currency of the future or maybe at
[82]
the very least a really good store of
[84]
value in many ways it almost is today
[87]
but there are a few things we need to
[89]
understand before we get into that so
[92]
what is the fundamental reason behind
[94]
the Chinese blackouts what could this
[96]
teach us about our modern Global
[97]
economy's relationship with energy and
[100]
finally what could we learn from this
[101]
issue when inevitably faced with our own
[103]
energy challenges in the coming decades
[106]
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China's energy crisis actually started
[153]
two years ago when the government rolled
[155]
out reforms in an attempt to liberalize
[157]
the energy industry in the nation up
[158]
until that point the relationship
[160]
between the energy plan operators and
[161]
the grid operators was almost entirely
[164]
dictated by the government the companies
[166]
that ran the plants would produce a
[167]
given amount of power and sell it to the
[169]
grid operators for a set price and those
[171]
good operators would provide that energy
[173]
to businesses and households for a
[174]
slightly higher price turning themselves
[176]
a profit now this might be a bit
[178]
controversial but energy generation and
[180]
distribution is actually one of those
[182]
markets that does well for itself by
[184]
having a few government controls put in
[186]
place for a few reasons for starters
[189]
it's a market prone to being monopolized
[191]
the extremely high barriers of Entry of
[193]
building a power station or laying out
[195]
an energy grid mean that only the
[197]
largest companies in a given country
[198]
could even consider making the
[200]
investment necessary to compete with an
[202]
existing provider it's also heavily
[204]
dependent on land as a factor of
[206]
production as with all products
[208]
producing and supplying energy requires
[210]
certain combination of land labor and
[213]
capital we've already seen that the
[215]
capital requirements as in the power
[216]
plants and the power lines are extremely
[219]
significant but the land is perhaps even
[221]
more of a hurdle to entering this Market
[223]
power lines take up a significant amount
[226]
of space spread out all over suburbs and
[228]
Industrial centers and people naturally
[230]
don't like them hanging around their
[231]
homes either if bringing a competing
[233]
energy source to Market meant building
[235]
out a competing energy grid then
[237]
unsightly power lines substations and
[239]
high voltage energy Towers would be
[241]
multiplied by two or if there's lots of
[243]
competitors in the market it would be
[244]
multiplied by however many companies
[246]
have decided to build out their own
[248]
infrastructure in order to compete for
[250]
end user dollars despite this being very
[253]
materially wasteful it's also comically
[255]
unfeasible because just a dozen or so
[258]
providers all of the usable land around
[260]
urban areas would be taken up by a
[262]
cobweb of competing energy lines it's
[264]
for this reason that utilities like
[267]
roads plumbing and electricity are
[269]
subject to strict government regulations
[271]
in many instances they are just totally
[273]
government run but even when they are
[276]
privatized they are normally sold to
[277]
large companies with an equally large
[279]
rule book about what they are allowed to
[281]
do coming with it this is exactly what
[283]
has happened in China there are hundreds
[286]
of power plants all over the country
[287]
that are primarily coal-fired these
[290]
energy plants sell their power to grid
[292]
operators who are acquired by law to
[294]
sell their energy for a preset price
[296]
this pricing regulation means that quid
[299]
operators who have an effective Monopoly
[301]
on energy distribution can't charge
[302]
whatever they want for power in order to
[304]
generate massive profits they instead
[307]
have to charge this government mandated
[308]
price which eliminates the problem of
[310]
the monopoly's pricing power but it does
[313]
cause another problem the energy grid
[316]
can only reasonably purchase energy from
[318]
the providers for a price lower than
[320]
what they are allowed to sell it at so
[322]
if for example the price of coal more
[324]
than quadruples within 12 months then
[326]
it's going to cost more to produce
[328]
coal-based electricity than these grid
[329]
operators are allowed sell it for so
[332]
they just don't buy the electricity and
[334]
the power Stations don't produce it
[336]
there are millions of homes and
[338]
businesses across China right now that
[340]
would be willing to pay a higher price
[342]
for access to Reliable electricity but
[345]
due to regulations that's just not
[347]
possible this issue has been compounded
[350]
by ongoing trade tensions with Australia
[352]
who has historically been China's
[354]
largest coal provider as well as a push
[356]
by certain local authorities to actually
[357]
reduce coal burning ahead of the 2022
[360]
Winter Olympics in an attempt to avoid
[361]
smog which could make the country look
[363]
bad on the world stage this is a very
[367]
interesting issue with so many moving
[368]
parts that really is hard to see what
[370]
will end up happening but I'm not
[373]
actually bringing this up to talk about
[374]
any fundamental issues or speculate on
[376]
future problems within China I'm
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actually too scared to do that anymore
[380]
you absolutely should not at all be
[383]
investing in Chinese equities in fact
[385]
even for more seasoned investors the
[388]
market for Chinese companies is not
[390]
exactly the promise land of double-digit
[391]
annual returns you might think it is a
[394]
few moments later Chinese government
[396]
cracked down on so many components of
[399]
the technology industry in China and
[402]
what that ultimately means and how that
[403]
plays out you know we saw DD uh down
[407]
materially I don't know I don't know how
[409]
how much DD has a stake in the education
[411]
but you're let's look at perhaps the
[414]
most pressing issue in the nation at the
[416]
moment the real estate market in China
[418]
is a multi-trillion dollar Time Bomb the
[420]
company is the world's most indebted
[422]
property developer with about 300
[424]
billion dollars worth of net debt at
[426]
least its bonds are included in a number
[428]
of indexes across Asia it indirectly
[430]
creates more than three million jobs
[435]
all jokes aside though there really is
[438]
nothing necessarily unique about China's
[440]
situation we even saw similar issues
[442]
last year in Texas with their variable
[444]
pricing models leaving Millions without
[446]
power and millions more with devastating
[449]
energy bills in fact this is all perhaps
[451]
the symptom of a much larger economic
[454]
factor and that's the relationship
[456]
between energy and prosperity when we
[459]
are looking at indicators and predictors
[461]
of economic well-being there are a few
[463]
things that economists will turn to to
[465]
paint a picture GDP per capita life
[468]
expectancy educational attainment
[470]
corruption and even combinations of
[472]
these factors used to make things like
[473]
the human development index but perhaps
[476]
one of the strongest determinants of
[477]
prosperity is access to energy if we
[480]
look at a list of the countries that
[482]
consume the most energy per capita It
[484]
lines up almost perfectly with list of
[486]
countries ranked by GDP per capita the
[488]
same is true if you just looked at
[490]
aggregate numbers total energy
[492]
consumption and total GDP till a very
[495]
similar story but this raises two
[497]
important questions is this a case of
[500]
richer countries naturally using more
[502]
energy to power more luxurious
[503]
Lifestyles or is it that countries with
[506]
more power naturally become richer and
[509]
then whatever the answer to that
[510]
question is how do you explain this
[512]
China is using 7.5 million gigawatt
[516]
hours of electricity per year which is
[518]
almost a third of the world's total
[520]
electricity usage and more than the next
[523]
seven largest economies in the world
[525]
combined despite this their economy is
[528]
for now smaller than Americas and
[530]
certainly much smaller than all of these
[532]
other economies combined so what's going
[534]
on here is there some reason for this
[537]
massive apparent inefficiency Let's Take
[539]
America as a generic Advanced economy
[542]
its electricity usage is pretty evenly
[544]
split into residential commercial and
[546]
Industrial there is also a tiny fraction
[549]
of a percent which is used for
[550]
transportation as in electric cars buses
[552]
and trains but for now we can pretty
[554]
much ignore that residential consumption
[557]
is the largest share of this usage and
[559]
it accounts for basically everything
[561]
done within the home it also accounts
[563]
for home-based businesses if for example
[565]
you are running a computer to work from
[567]
home or maybe even mining Bitcoin in
[569]
your basement these are supposed to
[571]
count as commercial usage but the EPA
[574]
which created this report really does
[576]
not have an effective way to track that
[577]
so it just kind of bundled it into
[579]
residential despite these outlying
[581]
factors we can generally assume that
[583]
this is the sector that is energy usage
[585]
as a result of wealth rather than the
[588]
sector that is growing wealth if we want
[590]
to look at energy usage that creates
[592]
wealth we need to instead look at the
[594]
commercial and Industrial sectors and by
[597]
the way if you are confused about the
[598]
difference between the industrial sector
[600]
and the commercial sector don't worry I
[602]
was too basically the commercial sector
[604]
is made up of office space shop fronts
[606]
warehouses anything that goes into
[608]
running a business that's not actually
[610]
physically building a product when you
[612]
think of the industrial sector just
[614]
think of fair income fact factories
[616]
refineries smelting plants and yes
[619]
ironically enough even power stations as
[622]
of 2020 the industrial sector accounts
[624]
for less than a quarter of all
[626]
electricity usage in the United States
[627]
and it was a similar story even before
[630]
the pandemic when we compare these to
[632]
China we can see that 81 of their energy
[635]
usage goes towards industry and just
[638]
eight and twelve percent go towards
[640]
commercial and residential applications
[642]
respectively now this might not come as
[645]
a huge surprise most of you watching are
[648]
well aware that China has a much larger
[650]
industrial sector than the US except it
[653]
doesn't really China's industrial sector
[656]
had a nominal output of 4.7 trillion US
[658]
dollars in 2017 whereas the US had a
[662]
nominal industrial output of 3.6
[663]
trillion dollars in that same year if we
[666]
reverse engineer the numbers a bit here
[668]
we can find that China is using about 6
[670]
million gigawatt hours on industry while
[673]
the US is using 1 million gigawatt hours
[675]
on industry the option of that is that
[677]
the US is almost five times more
[679]
efficient at turning electricity into
[681]
value so again what's going on here well
[685]
the first thing of course is that
[686]
China's data might not be super reliable
[688]
almost every other country on this list
[691]
got its energy production figures
[692]
recorded by the eia which stands for the
[695]
Energy Information Administration an
[697]
American organization tasked with
[698]
collecting information on energy
[700]
production and usage all over the world
[702]
China instead elects to publish its own
[704]
figures through the state Council which
[706]
is fine but they do put a bit of a
[709]
political spin on what is supposed to be
[711]
boring objective data China's
[714]
electricity consumption a key barometer
[716]
of economic activity maintains steady
[718]
expansion in 2020 as the country ended a
[721]
year with a solid economic recovery
[722]
despite the ravaging covid-19 epidemic
[725]
look it really is no way of knowing if
[727]
this is accurate or not but the
[729]
government knows energy usage is a very
[731]
closely monitored statistic amongst
[733]
decision makers around the world so it's
[736]
not unrealistic to think that they might
[738]
have massaged the numbers a bit
[739]
something something the chocolate ration
[741]
has always been 20 Grands again make up
[744]
your own mind on this one because your
[745]
guess is as good as mine even if we
[747]
ignore this issue the biggest reason for
[749]
this apparent imbalance is something
[750]
called purchasing power parody a dollar
[753]
in China buys you a lot more than a
[755]
dollar in the United States especially
[757]
when it comes to manufactured goods and
[759]
electricity if we balance this
[761]
purchasing power then China's industrial
[763]
output goes from being about 30 higher
[766]
than Americas to almost 200 percent
[768]
higher than Americas in effect they are
[771]
genuinely making a lot more stuff than
[772]
America is it's just that the stuff is
[775]
worth a lot less in the Chinese market
[776]
this adjusted figure means that China
[779]
does still use more electricity per
[781]
dollar in manufacturing output than the
[782]
us but not by much if we assume the
[786]
actual electrical output figures are
[787]
overstated by some degree they might
[789]
genuinely be on parity now what all this
[792]
means is that energy is really unique in
[795]
the sense that it is both the Chicken
[796]
and the Egg of economic wealth it is
[799]
both useful for creating wealth and
[801]
instrumental in determining wealth for
[803]
that reason it can almost be thought of
[805]
as the unrecognized Global Currency
[808]
currencies are a way to store and use
[810]
value in an efficient manner if you work
[813]
a regular job you are trading the value
[815]
of your time and your skills for money
[817]
that money is effectively a way for you
[819]
to store that value until you use it to
[821]
purchase a good or service which in
[823]
theory should be equal in value to what
[825]
you contributed to your employer I know
[827]
that very broad definition might make a
[829]
few people angry but that's the theory
[831]
now money can take a lot of forms gold
[835]
coins digits on a computer paper
[837]
rectangles seashells it really doesn't
[839]
matter so long as people agree it has
[842]
value now that value can be very
[845]
abstract I'm sure there are some of you
[847]
watching that will say that fiat
[849]
currency which is by far the most common
[850]
currency used around the world today
[852]
doesn't truly have value those same
[855]
viewers might advocate Kate for a
[856]
returned to the gold standard because
[858]
gold is a little bit more tangible as a
[860]
store of value especially since it can't
[862]
just be created out of thin air but even
[865]
gold drives a majority of its value from
[868]
people believing it has value sure it's
[871]
rare and it's a great conductor and it
[873]
looks kind of pretty but it's just a
[875]
metal being stuck on a desert island
[876]
with a gold brick is just as bad as
[878]
being stuck on an island with a wad of
[880]
cash and actually a quick side note is
[883]
that Gold's scarcity is actually a major
[884]
problem when trying to use it as a
[886]
currency most economies around the world
[888]
today try to Target a low level of
[890]
inflation of around one to three percent
[891]
depending on the central bank they do
[894]
this so people are motivated to either
[895]
invest or spend their money which
[897]
stimulates the economy if a finite
[899]
resource like gold was used as a
[901]
currency then a lot of people would just
[902]
choose to sit on it knowing that the
[904]
economy will grow but the supply of
[906]
money won't making their Holdings more
[908]
valuable every year this stagnation
[910]
would stifle economic growth which is
[912]
why most economists see moderate
[914]
inflation as preferable to deflation
[917]
anyway all of this is to say that gold
[919]
is not much better than paper rectangles
[921]
when it comes to being a store of True
[923]
Value or a currency they both depend
[925]
almost entirely on people agreeing that
[928]
they have value this is where energy is
[931]
different it really does have value both
[933]
in the sense that it can be used to make
[935]
other things a value and because it can
[937]
be used to improve your own quality of
[939]
life not just humans but all Life as we
[942]
know it has valued energy above almost
[943]
everything else trees reach for the sun
[946]
to conduct photosynthesis lines hunt
[948]
zebra to feed on their calories and
[950]
humans fight entire Wars over access to
[952]
oil fields an economy that just prints
[955]
lots of money isn't necessarily rich and
[957]
even all the gold in the world doesn't
[959]
mean much unless it can be traded for
[960]
something else just ask Midas but an
[963]
economy that can produce lots of energy
[965]
is simply wealthy not enough water oh
[968]
well just use desalination plants no
[970]
natural resources that's fine just
[973]
import them then use your Limitless
[974]
supply of energy to transfer almost raw
[976]
materials into a value-added product
[978]
export that product back at a markup and
[980]
then import even more raw materials this
[983]
is actually basically what Iceland does
[984]
today to a less extreme degree so if you
[987]
want to learn about how this plays out
[988]
in reality go and watch that video after
[991]
this one economics is a study of
[993]
scarcity and theoretically any economic
[995]
problem can be solved with unlimited
[997]
energy what's more is that sure energy
[1000]
can't be created or destroyed but it can
[1003]
be transformed into more useful forms
[1005]
almost endlessly someone sitting on
[1007]
their life savings of kilowatt hours is
[1009]
likely to see the value of those savings
[1011]
decrease over time as an economy
[1013]
increases its capacity to generate
[1015]
energy in usable forms of course if this
[1018]
energy-based currency was to become a
[1020]
reality we wouldn't be walking around
[1022]
with pockets full of batteries we would
[1024]
likely do what we did with gold back in
[1026]
the day and trading bills denoting a set
[1028]
value of energy that would be stored
[1030]
somewhere which is better equipped to
[1031]
house it like a battery bank anyway is
[1035]
this likely to be adopted of course not
[1038]
at least not the immediate future but
[1040]
understanding this relationship between
[1042]
wealth and energy can actually be a very
[1044]
insightful way of viewing global
[1046]
economic events at almost any scale the
[1049]
author and Economist vaklov smell does
[1051]
this in a number of his books and I
[1053]
definitely suggest checking them out if
[1054]
this was at all interesting to you he
[1057]
goes into much more detail and can
[1058]
obviously address much more Nuance than
[1060]
is possible in a 20 minute video but
[1062]
even still thinking of energy as a true
[1064]
store of value can make issues like what
[1066]
is happening in China at the moment much
[1068]
easier to break down and understand it
[1071]
can also be useful on a smaller scale if
[1074]
you're looking for a business idea don't
[1076]
think of a better way to make or save
[1077]
money think of a better way to make and
[1079]
save energy in the long run it's gonna
[1082]
be more valuable now of course to do
[1084]
that you're going to need to know
[1085]
something about thermodynamics or
[1087]
Battery Technology or maybe even
[1089]
workflow optimization fortunately you
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signing up using the link in the
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watching mate bye
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