March 30, 2013

Is our economic model based on cheap energy?

Not really.

First, both the US and other developed countries got that way with "moderately expensive" energy, not cheap energy. Oil and electricity have been cheap in the US in the post-WWII period, but energy was rather higher in years before that: coal and electricity cost much more, adjusted for inflation. The US, and other countries, succeeded quite well in growing strongly even when energy was much more expensive, whether it was coal or oil.

Wind power is quite affordable (if perhaps not quite as dirt cheap as US post-WWII oil and electricity prices), scalable, high-E-ROI, etc, etc. So are nuclear, and solar even if they aren't quite as cheap at the moment (coal is also plentiful and cheap, unfortunately), so I see no reason to expect energy to ever be more than "moderately expensive".

The fact that energy pre-WWII was a much higher portion of GDP means that it was a much heavier burden on the economy. If wind and solar are a little more expensive, that means that the wind/solar sector has to be a little larger than otherwise to power the rest of the economy. This analysis suggests that this is not a big deal: that sector would still be a much smaller portion of the economy than pre-WWII.

Second, fossil fuels aren't nearly as cheap as they seem. Pollution is an unrecognized, external cost. So are the military costs we're seeing currently of roughly $500B per year. Those pollution costs aren't sustainable (especially CO2), but unfortunately the military costs of security for oil supplies probably are (in fact, many corporate interests are quite comfortable with them...). Not that they don't entail many costs to the economy, including diverting scarce scientific and engineering talent away from creating new products, and growing the economy. Moving away from oil and other fossil fuels will actually be much cheaper in the long-run than BAU.

Finally, let's assume that Business As Usual involved spending about 5% of our economic activity (perhaps measured by GDP) acquiring energy. If the cost of acquiring energy doubles, then we have to dedicate another 5% to that activity. GDP might go down by 5% quickly, in case we'd have a deep recession. Or, it might happen over time - if it took 10 years, then we'd see a reduction in economic growth of .5% per year, for 10 years. After that transition was complete, economic growth would continue. So, a reduction in "net energy" has a significant impact, but it's not TEOTWAWKI.

Does unusually strong growth since 1945 show the value of cheap energy in that period?

No, US growth was faster before 1945, using moderately expensive, non-oil energy:

1800-1900: 4.13%
1900-1945: 3.53%
1945-2000: 3.17%

"real GDP" at http://www.measuringworth.com/growth/index.php

5 comments:

Batalos said...

"energy was rather higher in years before that: coal and electricity cost much more, adjusted for inflation. The US, and other countries, succeeded quite well in growing strongly even when energy was much more expensive, whether it was coal or oil"

yep, energy was more expensive then, but... but before then energy was even more expensive, so the economy had the advantage of relatively more and more cheap energy. That's a big difference: transition from relatively expencive energy to relatively cheap - and vice versa

"Second, fossil fuels aren't nearly as cheap as they seem."

External costs play in the long run. For economy external costs are just starting to matter... For happy growing economy of 20th century there were no external costs.

Nick G said...

Batalos,

I don't think "cheapness" is a useful way to think about energy.

Fossil fuels simply weren't scalable until the proper technology was developed. Once it was, it's price was relatively unimportant - other things were the bottleneck to doing things: labor, primarily.

Post-WWII, energy prices fell, yet growth did also.

Regarding externalities - post WWII, projecting military security for oil supplies became very important. That had many costs to the economy, including diverting scarce scientific and engineering talent away from things that actually helped people.

Good questions - I'll incorporate them into my post...

Fixed Carbon said...

Your history of energy expense is a fascinating one, as are the two comments. How about some time series graphs? I'm looking forward to making them myself, when I have time. You have been thinking about this issue, and might be able to put the graphs up straight away.

Tom said...

Nick,

Thanks a lot for this blog. It's a nice antidote to the drastic errors and doomsday cultism that often prevail in places like The Oil Drum. We need more people spreading real information.

I don't know if you've seen my bountifulenergy blog.

-Tom S

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