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Current economic difficulties are not the fault of single decisions or decision-makers; it’s energy, stupid!

The current conundrum discussed in the news and the public is between (1) Western government spending to keep stimulating their economies after the decade-long period of overspending and (2) savings to prevent future collapse of governments under their own debt burden. Unfortunately, energy resource availability is rarely a part of the discussion, and pundits never point to it as a core driver. This is quite unfortunate.

There is no one consensus on the “economic growth” issue among mainstream economists as the proper choice, or series of choices, is quite unclear. There appears to be no good path, only a choice between bad paths. Ecological or biophysical economic arguments have historically been quickly dismissed as invalid, yet no other economic theories are based upon anything tangible. We hear of the need to “consumer confidence” as if that is a tangible and meaningful reason to invest. Irrational exuberance, or extreme confidence, is exactly what pushed us to two boom-bust cycles (dot-com and now housing) over the last two decades. Confidence only takes you so far, and at some point you need something tangible upon which to base economic theory. That tangible good is essentially natural resources, primarily energy, and the technologies that convert those resources to consumer products and services.

Because increasing consumption of natural and energy resources are the key driver of economic growth, if you do not increase their consumption, you do not grow. Yes, more efficient energy production and conversion systems (power plants, vehicles, mining, etc.) also induce economic growth, but the past only indicates the higher efficiency begets higher total consumption – due to Jevon’s Paradox. However, when fossil resource availability does decline due to depletion, we’ll be happy for higher efficiency services even when total consumption decreases.

Adding or switching to energy resources and technologies, where they exist, takes decades. Translation: this is longer than election cycles. Thus, a US president that implements energy efficiency or conservation policies will generally not reap the rewards or drawbacks of those policies. The next President, or perhaps a second one down the line, will be dealing with those problems. Since 2000, the United States has consumed roughly the same total amount of primary energy, about 100 quadrillion Btus per year. There has never been a time in US history at which total energy consumption was stagnant for this long. Much of the reason for the stagnation in energy consumption was offshoring of energy-intensive industries to developing countries, and thus there are less and less non-skilled jobs available after each economic downturn. The US economy restructured based upon increasing energy prices during the last decade, and companies traded cheap energy in the form of the muscle of Chinese, for more expensive energy, in the form of natural gas and petroleum.

Thus, major structural changes in the US economy have occurred over the last decade, and no policy can reverse these trends in less than another decade. The reason that economists, and even Federal Reserve Chairman Ben Bernake are calling the economic future “unusually uncertain” is that the US has never encountered the situation at which we now reside. Energy consumption is flat. World oil production is at a plateau. We have shipped jobs to China and borrow their profits to feed our consumption habit. Unemployment is high.

Policy can’t ship more jobs to China because hindering employment even further is a political death nail. Policy can promote offshore oil and renewable energy technologies, but those resources and technologies have lower energy return on energy invested (EROI) than the resources we have used in the past. Lower EROI means more of the economy must focus on energy production itself rather than producing other more discretionary economic goods. And a change in transportation mode (electric cars, electric and/or high speed trains) will take decades, and these changes can work, but they may never be as economically as productive as burning petroleum at $20/BBL to $60/BBL.

So the reason that economists see a “sluggish” or “low-growth” economy in the foreseeable future is due to energy. From 2000-2008, we pretended that high rates of GDP growth could occur without increasing energy consumption. Increasing prosperity of the developing world has strained energy resources to the point that we must adjust to a future with energy consumption that is both lower and from new resources and technologies. These technologies and resources, even without considering altering them to prevent greenhouse gas emissions, are less productive. So if you put these concepts together, you end up with the result that we must (1) invest in new energy technologies that (2) employ more people per output (kWh, liter of fuel, etc.) and produce (3) lower net energy than historical coal, natural gas, and oil (even future coal, oil, and natural gas are less productive) such that (4) the energy sector grows as a proportion of the economy and (5) by definition the rest of the economy must shrink. Either this reality we become true, or the scientists working on fusion will pull a rabbit out of hat. No tax policy of a President will do much to significantly alter this equation. Only energy consumers can wait to see if we do or do not pull off sufficient technology solutions, and adjust their habits accordingly.

About Carey King

Dr. Carey W King performs interdisciplinary research related to how energy systems interact within the economy and environment as well as how our policy and social systems can make decisions and tradeoffs among these often competing factors. The past performance of our energy systems is no guarantee of future returns, yet we must understand the development of past energy systems. Carey’s research goals center on rigorous interpretations of the past to determine the most probable future energy pathways. Carey is a Research Scientist and Assistant Director at the Energy Institute at The University of Texas at Austin, and appointed also at the the Center for International Energy and Environmental Policy within the Jackson School of Geosciences and Business, Government, and Society Department of the McCombs School of Business. Visit his website at: http://careyking.com and follow on Twitter @CareyWKing
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