ECONOMIC GROWTH AND ENERGY CONSUMPTION

Energy is a vital ingredient to economic growth. This has been recognized at least as long as economic statistics have been compiled by government, and probably for much longer than that. Perhaps the best example of the fundamental role that energy plays in large, complex national economies is found in the 1973–1974 oil embargo, when oil-producing nations of the Middle East restricted supply and prices rose fourfold in a space of a few months. The resulting chaos in the oil-consuming economies of the industrialized West was widely considered to be a direct result of the embargo. In the United States alone, Gross Domestic Product—an accepted measure of economic activity—fell in 1974, after two decades of steady growth. The high cost and scarcity of oil was seen as the primary cause.

ENERGY AS AN INPUT TO PRODUCTION

What makes energy and economic growth go hand-in-hand? Traditionally, economists since Adam Smith have discussed the major inputs to economic activity as being land, labor, and capital. While very descriptive of the agrarian economies of the seventeenth and eighteenth centuries, the growth of industrial nations in the nineteenth century can be seen in retrospect to have been the result of a fourth major input, energy. Energy can be seen simply as the ability to multiply the work of laborers exponentially. Where the agrarian society had to make use of horses and mules for transportation services, the industrial economy could take advantage of the miracle of the internal combustion engine, which, when powered by gasoline, could lower the costs and increase the availability of transportation by orders of magnitude. Where once laborers did their jobs with scythes, shovels, and other tools, energy enabled them to increase their outputs tremendously by powering great machines such as tractors, cranes, and pile drivers. Power for illumination allowed the growth of multiple "shifts," greatly increasing the output that could be produced over a given period of time.

ENERGY INTENSITY

The ratio of energy consumption to economic activity is referred to as the "energy intensity" of an economy. Energy intensity may also be measured at lower levels of aggregation, such as at the industrial or transportation sectors of an economy. In general, as nations move into a more industrialized state, they find that their energy intensity greatly increases, as the demands of a more complex economy require a greater amount of energy per unit of output. Another way to think about the role of energy is that the ability to harness it technologically allows an economy to

greatly increase its economic potential (e.g., to expand its production possibilities frontier). An example of such growth might be that of the United States during the late nineteenth and early twentieth centuries, as it began the transformation that would make it the world's leading industrial power, powered by its then-abundant supplies of petroleum. Another example would be China during the two decades starting in the late 1970s, as it moved away from a totally state-controlled economy to a partially market-driven system. During this period, China experienced one of the highest rates of growth in the world, driven largely by its ability to harness its huge coal reserves in the production of electricity and for transportation services.

THE EFFECT OF ECONOMIC MATURITY ON ENERGY USE

As nations become more economically mature, two effects are typically seen. One, the rate of economic growth necessarily slows, as the base of economic activity expands and opportunities for easy expansion become more scarce. Two, the use of energy becomes more efficient as consumers and manufacturers become more knowledgeable about its use, and technological progress enables economic output to be produced with less energy input.

The post–World War II experience of North America and Western Europe provides an excellent example of both of these effects. Between 1949 and 1973, the year of the oil embargo, the United States expanded its output of goods and services at an annual rate of 4.1 percent; Great Britain showed a growth rate of 3.0 percent. The oil embargo caused a major structural shift in these energy-consuming nations. It took more than a decade for these countries to return to the economic growth rates they had enjoyed before 1973. Not until after 1983 did Great Britain return to consistent economic growth of 3 percent or more. In the United States, the post-embargo period was characterized by economic growth rates that were more moderate than the pre-embargo period, especially after a second round of oil price increases in 1979–1980. But the second effect also became evident, as energy efficiency, stimulated by the extraordinary rise in energy prices, became a hallmark of the industrialized nations. In the United States, energy intensity fell more than 30 percent between 1970 and 1986; in France, the decline was 21 percent between 1970 and 1990.

FACTORS DECREASING ENERGY INTENSITY

More efficient automobiles were large contributors to the decline in overall energy intensity, as both consumers and government regulators took steps to increase the efficiency of cars by making them lighter, smaller, and equipped with more efficient engines. Homeowners also contributed to the reduction in energy intensity, by lowering thermostats, using more efficient lighting, and purchasing more efficient furnaces, air conditioners, and electric appliances. Some of these behaviors were mandated by laws and regulations forcing manufacturers to market appliances that consumed less energy, or to label their average energy consumption. But most were the result simply of supply and demand stimulating long-term changes in habits that reduced the consumption of a high-priced economic input, energy, in favor of other, lower-priced inputs.

THE WORLD'S LARGEST ENERGY USERS

Past patterns of economic growth shape current patterns of energy consumption. The largest energy-consuming nations tend to be those whose economies are also the largest, such as the United States, Japan, and Western Europe. In 1997, the world's ten largest economies—ranging from the United States to Spain, and representing more than three quarters of the world's gross domestic output—also accounted for 58 percent of the world's energy consumption (Table 1). The energy intensities of these nations varied widely, however, ranging from less than 6,400 British thermal units (Btu) per 1990 U.S. dollar of Gross Domestic Product (GDP) in Japan, the most energy efficient of the world's largest economies, to more than 45,000 Btu per GDP dollar in China (Figures 1 and 2). In large measure, these variations reflected the progress of each nation in reaching economic maturity. It also reflected the relative abundance of energy resources within these countries. Japan, for instance, has very little indigenous energy supplies, and is highly dependent on energy imports. China, on the other hand, is both a developing country and one with large domestic reserves of coal. Japan, along with many of the world's consuming nations, has also discouraged consumption by taxation; in 1998, regular leaded gasoline in Japan cost approximately $2.80 per gallon, of which about $1.70 was taxes. By contrast, the same gallon cost about $1.05 in the United States, only about $0.35 of which was due to taxes.

THE ENVIRONMENTAL IMPLICATIONS OF ECONOMIC GROWTH AND INCREASING ENERGY CONSUMPTION

Economic growth and increasing energy consumption are not always considered an unalloyed benefit. There are significant environmental consequences to energy consumption, including increased concentration of carbon gases in the atmosphere, emissions of sulfur dioxide (that cause acid rain) and nitrogen oxides (precursors to smog), water pollution caused by oil spills, and land issues related to coal mining and other energy production. Debates about how to ameliorate these effects inevitably include discussions of the economic impacts of such amelioration, and the effect on economic well-being of higher energy taxes or outright bans on consumption or production of certain kinds of energy. Non-polluting energy sources such as hydroelectricity, solar and wind energy, or, more controversially, nuclear-based electricity-for which there are considerable concerns about safety and waste disposal—have been discussed as long-term alternatives to the more traditional fossil-based fuels. While coal, oil, and natural gas have clearly been indispensable to the growth of today's modern industrial economies, it is also a certainty that the supplies of these energy forms are ultimately limited, and that future economic growth will depend on a long-term transition to other energy sources.

OUTLOOK

Some analysts have posited that, given the wide variation in energy intensities of the world's economies, we can look forward to a time when economic growth and energy consumption are effectively uncoupled. Moreover, this uncoupling can make it possible to reduce the environmental consequences of economic growth at a relatively low cost, because such growth will not mean an inevitable rise in the consumption of fossil fuels. Certainly the success of Japan and Western Europe in achieving low energy intensities is evidence that further reduction is possible in other parts of the world.

On the other hand, some of the differences in energy intensities reflects infrastructure that may be difficult to change. Some nations, such as the United States and Canada, are large energy consumers because their climate requires above-average heating and cooling, and their vast size makes transportation a more difficult and energy-intensive activity. China, which has similar characteristics with respect to climate and size, has the additional burden of being a largely agrarian, labor-intensive economy that still uses energy in relatively inefficient ways because it has not yet achieved the technological progress characteristic of the developed countries. Until more efficient means of heating, cooling, and transportation are found, and greater progress is made toward use of more efficient technologies in the developing countries, economic growth will likely continue to require additional energy consumption, but perhaps less so than in the past.

The possibilities of new sources of energy, such as energy from hydrogen, may also some day become economical, and help to uncouple fossil fuel consumption from economic growth

Scott B. Sitzer

See also: Energy Intensity Trends; Environmental Problems and Energy Use; Industry and Business, Energy as a Factor of Production in.

BIBLIOGRAPHY

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International Energy Agency. (1994). Energy in Developing Countries. Paris: OECD Publications.

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Jorgenson, D. W. (1978). "The Role of Energy in the U.S. Economy." National Tax Journal 31(3):209–220.

Jorgenson, D. W. (1998). Energy, the Environment, and Economic Growth. Cambridge, MA: MIT Press.

U.S. Department of Energy, Energy Information Administration. (1998). International Energy Annual 1996. Washington, DC: Author.