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.
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 is 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
Turning to oil. The real issue is the energy gap in the U.S. continues to widen with more oil being supplied from foreign countries. Oil and its by-products are used primarily for transportation, but are found in numerous industries such as plastics and film. The widening gap between supply and demand leaves the U.S. vulnerable to oil shortages and supply disruptions.
Figure 5 Oil Consumption and Production
Our energy bill is over $400 billion and that was in 2002 when oil was under $30 per barrel. In the U.S, our spending on energy is increasing faster then the growth in our population.
Figure 6 U.S. Expenditures on Energy
The continuing increase in the price of oil, driven by supply constraints and growing demand influence other commodity prices. Remaining known oil reserves are close to reaching peak production. There have not been significant new oil finds in the last couple of decades. The new oil finds lie deep within the ocean or in harsh artic climates, which makes extracting that oil much more expensive.
Figure 7 Oil and Gold Prices
The price of oil continues to climb to new heights. The price of oil tends to influence other commodity prices. The supply/demand imbalance for oil gives oil scarcity value which impact energy prices in general.
Why Oil Impacts the Economy
* Oil translates into inflation – 6 out of the last 7 spikes in oil have led to recessions
* 70% of oil consumption goes to cars and the U.S. needs to import 70% of its oil
* US consumes over 20 million billion barrels per day – 1/4 of world oil production
* decline in new oil finds since 1980s – only 1/10th of new finds produce oil
* Remaining oil reserves are more difficult to extract and at a greater cost
* OPEC holds all the easy oil and political instability in the region raises the likelihood of a supply disruption which adds to the price of oil
* China’s growing oil appetite changes everything: rising costs and greater CO2 production
Coal prices however, have remain relatively stable in comparison to oil. Despite its growing consumption of coal, China still exports coal and supply is fairly abundant in the U.S. and in China. The recent trend in coal prices is up. China growing demand for coal is expected to increase with the rapid pace of urbanization and demand for electricity. The bottom line is that coal is relatively cheap and abundant and oil is expensive and scarce.
Figure 8 Oil and Coal Prices
The problem with coal is its higher carbon content in relationship to hydrogen. Fuel efficiency is determined by the ratio of hydrogen to carbon. The higher the number of hydrogen atoms in comparison to carbon the greater the efficiency of the fuel. Coal has twice the amount of carbon molecules than oil thereby adding more CO2 emissions.
The hydrogen atom is a single proton and is the most abundant element in the universe. It is the hydrogen that really provides the fuel. The carbon atoms are just released in the process of energy transformation. The higher the ratio of hydrogen to carbon determines their efficiency. In Figure 9 fuels are positioned according to their efficiency and emissions.
Figure 9 Fuel Efficiency – Hydrogen to Carbon Ratio
With rising coal and oil consumption, greater emissions of carbon can be expected. Emissions of CO2 from developing countries are steadily rising. China’s CO2 emissions are up an 10% over the last five years as consumption of coal grew 9%.
As coal and oil consumption continues to increase, we are seeing rapid rise in the concentration of carbon dioxide (CO2) in our atmosphere.
Figure 10 CO2 Production
Recent studies on CO2 concentration in the atmosphere demonstrate a dramatic increase in CO2 levels.
Figure 11 CO2 in Atmosphere
Ice core samples from Antarctica and Greenland provide clues to atmospheric conditions over 400,000 years ago illustrate that CO2 level varied, but never exceeding 300 part per million. CO2 concentration levels and temperature are highly correlated.
Climate studies suggest that greenhouse gases from the use of hydrocarbon fuels could alter our climate. With rising global temperatures, and in particular, rising temperatures in the earth’s oceans could be responsible for larger and more frequent storms.
Figure 12 Major Insurance Losses
The losses from Hurricane Katrina are a magnitude higher than any other disaster. The real question is quantifying the economics of alternative energies. It certainly seams apparent that government incentives are necessary to invigorate the adoption of solar and wind energy.
Figure 13 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.
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