An Introduction to Energy Economics

* Article: Degrowth, expensive oil, and the new economics of energy. by Samuel Alexander. Aug 7 2012 by Energy Bulletin.

An excerpt from the Introduction by Samuel Alexander:

“Some new research and data, reviewed below, has come to light that seems to confirm this essential message. Expensive oil, in other words, does appear to be suffocating the debt-ridden, global economy, just as it is trying to recover (Hamilton, 2011; Tverberg, 2012b). Unfortunately, mainstream economists, including those in government, seem oblivious to the close relationship between energy, debt, and economy, and this means they are unable to see that expensive oil is one of the primary underlying causes of today’s economic problems. Consequently, they craft their intended solutions (e.g. stimulus packages, quantitative easing, low interest rates to encourage borrowing, etc) based on flawed, growth-based thinking, not recognising that the new economics of energy means that the growth model, which assumes cheap energy inputs, is now dangerously out-dated. When growth-based economies do not grow, household, firms, and nations struggle to repay their debts, and quickly things begin to unravel in undesirable ways.

Furthermore, even many of the most progressive ‘ecological economists’ fail to appreciate the important relationships between energy, debt, and economic growth. For several decades advocates of a ‘steady state’ economy (e.g. Daly, 1996) have been arguing persuasively that we need to move beyond the growth model, for various social and environmental reasons (Victor, 2008; Jackson, 2009). But very few seem to realise that interest-bearing loans are incompatible with a steady-state economy due to the fact that repaying debts plus interest implies growth (Sorrell, 2010; Trainer, 2011). Many ecological economists are against growth, without being against interest-bearing loans, and it is not clear that this is a coherent position. It is a tension that certainly deserves more critical consideration.

Similarly, ecological economists who argue for decarbonising the economy do not seem to realise quite how revolutionary this proposal is – which is not to say the proposal is misconceived (Hansen et al, 2008), only that its economic implications may be misunderstood. If the global economy managed to wean itself of fossil fuels over the next few decades in response to climate change, then a ‘steady state’ economy would be impossible, if a steady state is meant to imply maintaining anything like existing levels of affluence. It would be impossible because fossil fuels currently make up around 80% of global energy supply (IEA, 2010a: 6), and nothing like existing production could be maintained when we are talking about that level of fossil fuel reduction. Without fossil fuels, the world just would not have the energy supply to maintain a steady state of economic output; the economy would have to contract significantly. This is not a consequence many ecological economists seem to understand or dare to acknowledge.

While I accept that the world must transition to renewable energy sources without delay, evidence suggests that such sources will never be able to replace (fully or affordably) the energy contained in fossil fuels, especially oil (Trainer, 2012a; 2010a). Renewable sources are also fossil fuel dependent themselves, a point often and easily forgotten. Therefore, if we are serious about tackling climate change and getting off fossil fuels, we should be preparing ourselves for a world with perhaps half as much energy consumption, and this implies embracing, not a steady state economy, but some ‘degrowth’ process of planned economic contraction (Alexander, 2012b; 2011b). As the world’s population grows to nine or ten billion in coming decades, this reasoning is only going to get more challenging, because sustainable energy consumption on a per capita basis will decline even further. It is worth noting that even if there were no energy supply problems, the fact that the existing economy already greatly exceeds the sustainable carrying capacity of the planet (Global Footprint Network, 2012) means that significant overall economic contraction of some form would still be required (Alexander, 2012b; Clarke and Lawn, 2010; Latouche, 2009).

Needless to say, the powers that be are not willing even to entertain this ‘degrowth’ diagnosis or its radical implications, for it implies establishing fundamentally new economic systems that operate on much lower energy inputs. Empire, we can be sure, will not contemplate self-annihilation; it will struggle for existence all the way down. In much the same vein, consumerist cultures are very unlikely to accept any proposal to voluntarily reduce levels of consumption. Overcoming or dealing with these forms of resistance is the near impossible task that lies before those of us who seek a radically alternative, post-carbon economy (Trainer, 2010b; Heinberg and Leach, 2010; Alexander, 2011c).

If the world is to deal effectively with the ecological and economic problems it is facing, we urgently need to infuse a new economics of energy into our economic thinking and economic systems, both at the local and macro-economic levels. There is arguably scope for this transition to be a prosperous descent (Odum and Odum, 2001), but given how entrenched the growth model is, especially at the governmental level (Hamilton, 2003), a voluntary transition beyond growth economics will be neither easy nor likely. For those who do not expect governments to take the lead in this transition, I believe the best path forward is to begin preparing for economic contraction at the personal and community levels, by minimising consumption through voluntary simplicity (Alexander, 2009; Alexander and Ussher, 2012; Trainer, 2010), getting out of debt, and building local resilience in the manner of Transition Initiatives (Hopkins, 2008; Holmgren, 2012). Most of all, we need to get used to living with a lot less energy. While ultimately the aim should be to build a fundamentally new, degrowth economy ‘from below’ and thus effectively replace existing economic structures by ignoring growth capitalism to death (Trainer, 2010; Alexander, 2012a; 2012c), it may be that ‘resilience’ – the ability to withstand forthcoming shocks – is the most we can reasonably hope for (Alexander, 2012d; Barry, 2012).

Life is too complex and has too many variables at play for anyone to know with much certainty the nature of forthcoming shocks, exactly when they are going to hit, or how hard, but a confronting body of evidence is indicating that we ought be at work preparing our local economies for life after growth (Heinberg, 2011; Hirsch et al, 2010). We cannot rely on governments to lead us on this transition, for they seem committed to doing everything they can to maintain and conserve the existing system, which is counter-productive since that system appears to have no future (Gilding, 2011; Meadows et al, 2004). It is almost certain that we are going to have to build the new economy ourselves, at the household and community levels.

Before these grassroots strategies and goals will be taken up en masse, more people need to understand the relationship between energy and economics. ”

From the Conclusion:

“This report has attempted to outline in a very preliminary way some of the most important aspects of the relationship between energy and economics. As noted from the outset, the purpose was not to close the discussion, but to draw more attention to the issues under consideration.

Economic growth requires energy, especially oil. Stagnating oil production, however, is happening at a time when demand is continuing to rise. This means that oil is going to get more expensive – a consequence already playing out – but it is not clear that our economies can function on oil prices much above $100 per barrel or when total oil expenditure exceeds roughly 5.5% of GDP. The exact figures can be debated, and will be debated. But a strong case can be made that the price implications of slow-to-negligible growth in crude oil production is causing the global economy to stagnate, leading, among other things, to the inability of many households, firms, and nations to meet their debt obligations. This is causing significant economic instability around the world, and as oil prices rise in the future the situation is probably only going to get worse. This is not a happy message to convey, but in order to respond to problems effectively it is important that first their gravity is recognised and acknowledged.

In closing, I wish to reiterate the point raised in the introduction about the revolutionary implications of decarbonising our economies as a response to climate change. The latest evidence on climate change (see McKibben, 2012) does not present a pretty picture, implying that globally efforts to reduce fossil fuel consumption must increase by several orders of magnitude. A reduction of 80% by 2050 is a figure that is widely discussed as an appropriate goal, but that figure is rarely considered in the context of energy’s relationship to economic output.

Although it is wildly optimistic to suppose that the world is actually going to reduce fossil fuel consumption 80% by 2050 (see Figure 6 and 7 above), suppose it did? Suppose further that renewable energy is able to be ramped up so that total energy consumption is ‘only’ reduced by 50%. Since, as we have seen, productive activity is closely tied to energy consumption, exactly what type of economy would exist if the global economy only used half as much energy as it does today?

That is the question we must ask ourselves if we are truly attempting to understand what a transition to a just and sustainable world would look like. And if we ever managed to create such a world, it would seem that sustainable levels of resource and energy consumption would mean that we would all be living lives of radical simplicity. I hasten to add that this need not, in itself, be an undesirable change, if it were voluntarily chosen and wisely negotiated. Indeed, I am convinced that there can still be a ‘prosperous way down’ (Odum and Odum, 2001; Alexander, 2012d). But if, due to some form of collapse scenario, radical simplicity were to be forced upon people in coming decades, as it is already for many people today, one must admit that life in the future is going to entail unprecedented levels of suffering.”

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