Economics

Energy Economics
A brief overview of energy and its historic role in the economy and why energy is inextricably linked to our economic future.

The following link is a pdf file covering the role of energy in economics including historical overview and latest information justifying the use of alternative energy such as solar and wind.
Energy Economics

Why Use Alternative Energies?

Our ability to adopt energy supplied from the sun, wind, or fuel cells, depends on how the money flows. That is, what does it cost, and what’s the return or payback. Costs, expenses, and financial returns, are tied to the economics of the product or service. To better understand how the money flows in the energy market this brief presentation analyzes the consumption of energy with graphs. This brief attempts to guide in the understanding of the economics of energy by examining the historic prices for oil and coal. It is an overview of energy consumption, pricing, and the implications of our dependence on hydrocarbon energy. We believe the following statistics demonstrate: 1) energy prices continue to increase; 2) the enormous size of our hydrocarbon dependence makes any transition to alternative energy challenging; and 3) why investment into alternative energy is an imperative.

Energy was the main ingredient in the Industrial Revolution. The availability of risk capital, advances in technology, an available labor force, and access to energy were the enabling ingredients for economic growth. This is why energy is so important for economic growth.

It is a country’s ability to access energy that determines its future success. Before coal could be adequately mined, deforestation in Europe led to economic turmoil. Wood back in the 1600 was used for fuel, tools, homes, and wagons, so when shortages developed, prices rose dramatically leaving the poor to suffer.

Our economy is built on energy. Energy enables us to cook, heat, transport, and entertain. Most of our energy, electricity to power our TVs, gas for our cars, or heat for our homes, is derived from hydrocarbon fuels. The problem is hydrocarbon fuels emit carbon contributing to increasing levels of greenhouse gases and supply shortage and disruption that contribute to rising prices.

Figure 1 World Electric Generation

To start let’s look at electricity. Without having to go through supply and demand curves, our approach is to present charts that illustrate the dynamics of the global energy market using historic trends. From economics 101 we know that prices are established through changes in supply and demand.

The growth in the demand for electricity is growing faster than population growth both in the U.S. and globally. Almost every home in America uses electricity. Access to electric defines the modern world. On a global basis, demand for electricity has grown more dramatically over the last several years.

Figure 2 Electric Usage per Person

Despite gains with more energy efficient appliances, electric usage per person is increasing faster than population growth on a global basis. Growing use of electronic devices and home appliance as well as industrial growth contribute to greater demand for electricity.

Coal accounts for 49% of utility electric generation in the U.S., while is China, coal accounts for more than 80% of electric generation. Alternative energies such as solar and wind energy are still a small fraction of electric power.

Figure 3: Electric Generation

As China has begun to modernize its economy, demand for coal has increased significantly over the last decade. China is the largest producer of coal and its appetite for coal increased 9% per year over the last five years in comparison to its population growth of 1%. China’s demand for electricity rose 12% per year over the same time frame. According to the Energy Information Administration in the U.S., 49.7% of our electric was generated from coal in 2005. On a global basis electric from hydrocarbon fuels is 82%.

Figure 4 Coal Consumption

Figure 5 Energy and Economics

The rising cost of energy and the negative impact of CO2 in the atmosphere have major implications for our global economy. Government incentives for alternative energy sources along with declining prices and improving efficiencies translate into rapid growth for solar and wind energy systems. Our economy today may not be as tied to wood as we are today to oil, but scarcity value of fuel has major economic and political implications.