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Capitol Comment

    Capitol Comment 297 - Abundant Energy: The Building Block of Prosperity

    07/10/2001

    Rising gas prices and rolling blackouts have made energy policy a hot issue nationwide. Some believe the solution is to procure new supplies to meet increasing demand. Others argue that conservation and efficiency will make more production unnecessary.

    Misleading Terminology. In assailing the Bush Administration’s energy plan, the League of Conservation Voters (LCV) writes: "The plan fails to give meaningful attention to clean, innovative, available energy efficiency technologies and conservation measures that would address the nation’s short-term energy issues, at the same time reducing long-term demand on the nation’s finite supply of fossil fuels."1 LCV and other anti-energy groups use "efficiency" and "conservation" almost interchangebly, and imply that if Americans only became more energy efficient, we would need fewer resources to maintain our standard of living. This is, of course, a convenient argument against developing any new supplies of energy.

    However, these groups mischaracterize what efficiency really means. Using less energy is efficient only if the cost of the resources needed to replace energy use is lower than the cost of the energy that is "saved." For example, if a new dishwasher saves $100 worth of energy over its lifetime, but the additional parts needed to achieve this saving cost $200, nothing "efficient" has taken place because the total quantity of resources (including energy) required to manufacture the dishwasher has increased. Each completed dishwasher may use less energy, but the consumer who paid more for the dishwasher - and in a larger context the economy as a whole - is worse off.

    Energy Intensity. Given that anti-energy activists’ use of "efficiency" is simply a euphemism for cutting energy use, a more useful discussion should focus on energy intensity, that is, how much energy it takes to produce $1.00 worth of goods as measured by gross domestic product (GDP). In this regard, the United States has already made significant progress. In 1949, it took 20,633 British Thermal Units (Btus) of energy to create $1.00 worth of GDP.2 By 1999, that figure had dropped to 10,884 Btus per dollar of GDP, a decline of nearly 50 percent.3 This reduction has come about partly through changes in the types of goods produced, but also through technological improvements.

    Nonetheless, a reduction in energy intensity was not enough to avoid an energy crunch. During this same time, energy demand rose from 32 quadrillion Btus to 96.6 quadrillion Btus.4 Two factors explain this increase. First, economic growth is predicated on the use of energy and the American economy has grown strongly. Second, as energy intensity is reduced, the relative price of energy falls and people use more of it. Since the 1960s, only one circumstance has actually lowered the demand for energy: economic recession.

    Less Income = Less Demand. During the 1973-1975 recession, energy demand fell from 75.8 quadrillion Btus, to 72.0 quadrillion Btus. As the economy recovered, demand rose to 76.1 quadrillion Btus in 1976. In the recession of 1980-1982, energy demand dropped from 78.4 quadrillion Btus to 73.4 quadrillion, only to resume its upward march as growth surged in 1984. The recession of 1990-1991 saw demand for energy fall from 84.6 quadrillion Btus in 1989 to 84.1 quadrillion Btus in 1991. With economic growth resuming in 1992, demand for energy once again picked up, rising to 85.5 quadrillion Btus.5

    In all three cases, a run up in energy prices and recession were closely linked - in 1973, the Arab oil embargo, in 1980, the lingering crisis in Iran, and in 1991, the Persian Gulf War. As prices rose, people tended to purchase less energy, and falling incomes reduced that use still further. When the economy recovered and incomes rose, energy use once again increased.

    Those calling for cutbacks in energy consumption should be honest about a simple fact: energy use only falls when our standard of living is falling as well.

    Energy Use = Prosperity. Without question, reducing energy intensity has helped slow the growth of demand. Without increasing our "bang for the buck," America’s energy consumption would be much greater than it is today. In fact, while GDP grew more than 5 times over since 1949, the amount of energy needed to fuel the economy only tripled.6

    Still, no matter how one looks at these numbers, a glaring fact emerges. Without that tripling of energy supplies, the strong economic growth that has made the United States the most powerful economy in history would not have been possible. This dynamic is unlikely to change. Despite continuously falling intensity, the demand for energy is still expected to increase more than 32 percent by 2020.7

    The Golden State? Perhaps the most glaring example of why cutting back energy use cannot be the sole answer is provided by California. California has the 5th lowest energy intensity in the continental United States, using only 7,942 Btus to create $1.00 worth of goods as measured by Gross State Product (GSP). By contrast, the least efficient state in the lower 48 states is Louisiana, which uses nearly 27,400 Btus per dollar of GSP.8

    Yet California is paying sky-high prices and has been forced to resort to rolling blackouts. In no small measure this is because supply has simply not kept pace with demand. During the 1990s, in fact, demand for electricity rose by 11.3 percent while generating capacity actually fell by 1.7 percent.9

    Just a Part of the Solution. Encouraging true efficiency should be a key part of any energy policy - and part of any economic policy as well. However, claiming that simply using less energy is inherently "efficient" and will somehow eliminate the need for new supplies is to indulge in wishful thinking. As California has discovered, wishful thinking won’t keep the lights on.

    1 League of Conservation Voters press release, May 17, 2001.

    2U.S. Energy Information Agency, “Annual Energy Review 1999,”; U.S. Bureau of Labor Statistics, “Survey of Current Business,” August 2000. GDP numbers throughout are in chained 1996 dollars.

    3Ibid.

    4U.S. Energy Information Agency, "Annual Energy Review 1999."

    5Statistics in this section compiled from U.S. Energy Information Agency, "Annual Energy Review 1999,"; U.S. Bureau of Labor Statistics, "Survey of Current Business," August 2000.

    6Ibid.

    7U.S. Energy Information Agency, "Annual Energy Outlook 2001," December 22, 2000.

    8Bureau of Economic Analysis, Gross State Product Data, BEA Web site, May 29, 2001; U.S. Energy Information Agency, State Energy Consumption data files, EIA Web site, May 29, 2001.

    9U.S. Energy Information Agency, "California Electric Energy Crisis," EIA Web site, April 17, 2001.

     

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    Citizens for a Sound Economy Foundation

    Capitol Comment 297:
    Renewable Energy: Abundant Energy: The Building Block of Prosperity
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