- How energy efficient is the US economy? At first glance – very: total energy consumption reached a high in 2007, before the financial crisis of 2008, and currently it is below even the pre-Dotcom crisis of 2000. GDP, on the other hand, is up 35% and 90%, respectively, since then.
- However, we measure energy in energy units, BTUs, but we measure GDP in monetary units, USD. So, the picture changes if we account for the cost of energy indeed: as it rises above GDP (as during the 1970s oil crises, and post the 2008 financial crisis), the economy collapses; when it is lower (1990s), the economy prospers.
- The energy ‘efficiency’ of the US economy may be just another way of looking at the increasing costs of energy. The economy is ultimately not just an energy system, but a surplus energy system, i.e. what matter is the net energy available: if it takes a lot more energy to extract the new energy, then a lot of that energy is wasted in the process (that is another way of saying that the energy return on energy invested, or EROI, is increasingly decreasing).
- Shouldn’t energy be part of the Production Function, Y(L,K)? What about n(et)E(nergy)? In other words, if it takes increasingly more energy to generate the energy needed for output to grow, then energy costs will also be rising and this may cause potential GDP (and productivity) to decrease.
- In the past, energy consumption would dip after every single recession and subsequently rise, but that trend changed after the Dotcom bust and today we are still below those levels, 18 years ago. Yes, GDP is substantially higher, but GDP growth rate is also substantially lower (see Chart 1).
- The fact that US has become a major producer of shale oil is not helping because there’s been no corresponding decline in the cost of energy. In fact, the opposite is true, as EROI of shale oil is much lower than conventional oil (see Diagram above). In addition, there are issues of transportation and refining.
- Because shale oil is much lighter and thus not refinery-ready, oil prices may even have to rise further: the seemingly large oil glut we have had over the last year or so is masking the fact that shale oil cannot be currently so easily refined and prepared for consumption.
- We can see this also in the data. Despite the rise in shale oil production, total fossil fuel consumption has actually gone done since 2000. While nuclear energy is unchanged, this has coincided with a surge in renewables energy consumption.
- Digging deeper within fossil fuels, petroleum consumption is lower than the peak, pre the financial crisis in 2008, and, interestingly, lower than the peak in the late 1970s oil crisis. Similarly, for coal, where the decline post the financial crisis of 2008 is even more pronounced.
- The oil vs. natural gas consumption going in the opposite direction has a lot to do with their diverging costs: on an energy equivalent basis, natural gas is currently much cheaper than oil.
- The surge in renewables consumption has all to do with the rise in wind and, to some extent, solar. Biomass, which generally is the largest renewable consumed, has also gone up at the expense of hydro (2nd largest).
- Renewables consumption rise started in the early 2000s, at the same time when fossil fuels consumption started to decline; again, diverging costs of the two have a lot to do with this phenomenon: since the 2000s, the cost of solar energy has collapsed by about 25x, the cost of wind energy has halved, while the cost of oil has more than doubled.
- So, all this talk about shale making US energy independent, the question is at what cost? Technology is indeed making shale oil extraction possible, but it’s not like the cost of oil is going down (in fact it has gone up) =>Peak oil=Peak ‘cheap’/easily extractable oil (see Diagram 1 above, the newest forms of energy have also the lowest EROIs).
- Aren’t we better off in the long run focusing on renewables, where technology is actually making energy costs go down, instead of flogging a dead horse in the name of an old paradigm of fossil fuel?
- Finally, even if we assume that the US is indeed becoming more energy efficient, energy consumption per capita is still the highest in the world. In fact, 2x higher than Japan’s, which comes in second place.