Expectations, Air Conditioning, and the “Costco Factor”

Female Police Cadets, Goa, India

Female Police Cadets, Goa, India

DSI White Paper – By Richard L. Wottrich, Senior Consultant, International Services 

Atlanta USA

As the US presidential election drones onward, the myopic media obsesses about Romney’s tax returns, Obama’s “you didn’t build that” and whether or not Medicare will go broke in seven years instead of eleven years. Much ado about nothing.  The US is printing money at the rate of a trillion dollars a year as our national debt soars past $16 trillion. Easy to print money. Hard to create value.

Meanwhile the global forces that actually matter move relentlessly forward – little things like rising global temperatures, rising energy demand and 7,000,000,000 humans piling up trillions in debt to pursue their rising expectations.

Human expectations are measured in clever ways – GDP growth, auto sales, Tweets, GPS tracking and Facebook pages. What we do with this knowledge is interesting. We use it to manufacture more iPads, Louis Vuitton handbags, Tata Nanos, and gas stations – and we ignore its implications.

All human endeavors are driven by demand and demand is driven by expectations. But what drives expectations? Knowledge is a dangerous thing (to dictators)  – knowing what is possible, knowing what your neighbor already has, knowing what you can afford, and knowing you can have what was once considered a luxury – like Blue fin tuna, a cell phone or air conditioning.

Turns out that Social Media is perhaps the greatest stimulus to human expectations in, well, human history. Nearly 6,000,000,000 people have cell phones today – 86% of humanity. China alone has 1,000,000,000 cell phone subscribers!  More people have access to cell phones than to clean water. Now that’s a priority.

Within the cellphone category smartphones are the fastest growing product segment. Over 1 billion people are carrying a small computer in their pocket today. People are connected and in tune with what is possible and that drives their expectations. And people want air conditioning.

The US is the second largest consumer of energy (over 20% of global energy consumption) behind China, yet has just 4.3% of global population. US energy usage per capita has been somewhat stable since the 1970s due to evolving energy efficiencies and moving manufacturing offshore to Rapidly Developing Economies (RDEs). However, air conditioning usage has skyrocketed. Over 80% of US households and vehicles and virtually all prime retail and commercial office space in the US have air conditioning today. As a result Americans have the highest energy consumption per capita in the world, by a factor of three.

Air conditioning is virtually a ‘right’ in the US and studies have consistently shown that human comfort is key to productivity. Therefore more air conditioning means greater productivity means more energy consumption means rising global temperatures means more air conditioning. You could look it up.

But what if everyone wants more air conditioning? They do. Nearly all of the world’s biggest cities are in tropical climates. Well over a billion people reside in cities like Guangzhou (44 mm), Shanghai (26 mm), Bogotá (30 mm), Mumbai (20 mm) and on and on.  A modern city-state like Singapore could not exist without air conditioning.

Global sales of air conditioners in 2011 increased 13% over 2010 – a trend that expected to accelerate; perhaps by an order of magnitude by 2050.  The US uses more energy every year for air conditioning than the entire continent of Africa and its 1,000,000,000 people. The climate impact of US air conditioning on rising global temperatures is roughly 500,000,000 metric tons of carbon dioxide per year.

China, the world’s largest energy user and pollution producer, will surpass the US as the world’s biggest user of electricity for air conditioning by 2020. Fifty million air-conditioning units were sold in China in 2010 and total units in China will double in five years.  However while urbanized China, Japan, and South Korea will quickly approach their respective air-conditioning saturation points, the greatest demand will appear in South Asia and especially in India.

Less you think this is small beer, consider this. When Mumbai reaches air conditioning saturation its energy consumption as a single metro region will equal 25% of all US energy usage. Earlier this month India experienced two consecutive days of blackouts that impacted 600,000,000 people – and these blackouts were impacted heavily by peak air conditioning demand in urban regions.

Much of this is logical and intuitive at the same time. But we don’t know what we don’t know – there’s more. Much more.

Robert J. Michaels, a professor at California State University, Fullerton, recently released a study entitled “The Rebound Dilemma.”  In a nutshell, Professor Michaels asserts that the efficiencies advertised for Alternative Energy fail to take into account what happens when you offer humans a more efficient and cheaper version of something they want. What do we do? We buy more of it.

As the world struggles to switch to solar and wind power and other non-carbon based energy sources, inevitably the price of electricity from alternative energy will drop. When it drops people will not consume the same amount of power, they will consume more power and this will offset the supposed efficiencies of Alternative Energy.

I call this the “Costco Factor.” Costco spends a great deal of money, time and research arriving at the lowest volume discount price possible for a product , coupled with the largest volume of that product we are likely to buy. The consumer has to balance what they have to spend with how much of an item they want.

We’ve all been there. You can buy three pounds of Costco bananas for the same price as one pound at the local fruit and vegetable stand. But they go bad before you can eat them. So you make a decision, “What is the largest amount I can buy of something I want and still consume it the way I want to?” Then you buy it and inevitably consume it faster because it’s there.

Think of it this way. Historically Pistachios were grown in Iran and Turkey in an archaic labor intensive manner controlled by a few private companies. One pound of Pistachio nuts could cost $15.00 back in the 1980s. Now Pistachios are also grown in Australia, New Mexico, and in California utilizing modern agricultural practices. Today you can buy a three-pound package of California Pistachios at Costco for $18.17.

So what do you do? Do you buy one pound for $6.06? You can’t, so you buy the three-pound bag and probably eat them faster. Or you split the order with a friend, but you still buy the larger amount. This is the Costco Factor – “Buy more, consume faster.”

Costco does this with sleight of hand too, as many supermarkets do today. They play with product sizes to make direct comparison shopping difficult.

For example most of us are conditioned to buy pasta by the pound. Costco sells an eight-pack of Garofalo Italian spaghetti at an excellent price point. Most consumers believe they are buying eight one-pound packages of spaghetti. But the packages are marked at 500 grams, which is 17.6 ounces per package – that is 9% more pasta by volume then you thought you were buying . When you cook this pasta you don’t just take out 16 ounces – you cook the entire 17.6 ounce package – “Buy more, consume faster.”

Mexico recently conducted a cash-for-coolers program to swapout inefficient air conditioners and refrigerators for more efficient modern appliances. A World Bank study predicted that energy consumption would improve by 30%. They were wrong. All energy efficiency studies that fail to take into account the Rebound Dilemma and the Costco Factor are wrong. In reality, consumers chose better and bigger appliances with more features and actual energy savings were thus just 7%.

Somewhere in Mumbai there is a family of ten crammed into a two-flat. They have one old air-conditioning unit in their sleeping area to make the nights bearable. But when the global Big Box retail chains finally penetrate India, the full impact of the Costco Factor will accelerate air conditioning sales and energy consumption.

I have been in modern office buildings in India. They are among the coldest buildings I have ever been in anywhere in the world. Air conditioning is a luxury status item in India. It speaks to the success of the consumer.

This is the real world – the world of energy – where the battle to stay ahead of the power curve is a never ending story line. Just for the dynamics – remember that humans number over 7,000,000,000 now and 133,000,000 million babies are born every year – 24 million of them in India. That is another Mumbai every year – year after year. Humanity’s power needs are unrelenting, driven by its expectations.

Richard Wottrich, Blog Author – Richard.Wottrich@dsiglobalview.com