Enerconics: The Relationship between Energy and GDP

This is a write up of a presentation I gave which Neil Craig has been badgering me to put on line. It was written for a Scottish audience, but the argument and conclusion are valid worldwide.

An Energy Policy to Get Out Of Recession

In this talk I will outline an argument that a good energy policy is not only critical to get us out of recession but that energy is so intrinsically linked to GDP that energy policy more or less dictates how our economy performs.

Energy

So what is energy? The idea is not difficult for as my five year old son said:

“ENERGY IS THE POWER TO MAKE US DO THINGS”

Scientifically, the idea of energy started when people like Coriolis introduced the idea of energy being the work done. Work is something we do such as lifting a weight up or the work done when e.g. the dropping weight of a clock turns the dial. Another example is the work done as water falls down a water mill and drives machinery.

With the development of steam power, people began to realise that burning things to produce heat was also a way of creating energy or replacing the work done by a human or animal turning a wheel. At first people like the Luddites thought that all this “cheap labour” produced by burning wood or fossil fuels like coal was a “bad thing” because in effect coal was a cheap labourer replacing the more costly “food powered labourer”.

That did not happen.

Replacing human labourers, by machinery did not end the need for human labour. In the industrial age, mankind’s labour was needed in addition to machinery. We had human machines whose energy derived from food. And mechanised machines producing work, first from water & wind, and then the cheaper coal and eventually gas and oil.

Both machines and humans “work”.

GDP

GDP or gross domestic product can be measured or more accurately estimated, by a number of techniques. For our purposes the best measure to illustrate the point is that:

GDP is total (inflation adjusted) earnings from work (+ a few other things)

Rising GDP is an indication of a prosperous economy. In other words when GDP is rising even allowing for inflation, we are all earning more and more or to turn it around, we are all spending more and more.

But what does this really mean? The key to understanding GDP, is to understand how inflation is calculated. This is done by calculating the cost of a “basket of goods” which is thought to represent the cost of goods purchased by the typical household. If the cost of this basket increases, the price goes up and this increase is inflation (it seldom comes down). So we measure inflation by the monetary change of a standard basket of goods.

So, another way to describe rising GDP is that the average person can purchase a bigger and bigger basket of typical goods.

GDP & Energy

Both energy and GDP are related to work. GDP is the goods the average person can purchase on an average income. Energy is the work done by a unit of energy … which at one time was the average work by a person. GDP is earnings from the work done by the average person.

Why Energy increases Prosperity

A long time ago, the work done in the economy was entirely human. That work was powered by food. An average day’s work needed an average day’s food. The worker needed the energy from their food and the energy per adult male consumes about 2-3000 calories per day (~10,000kj or ~10megajoule) which is about the same energy as comes from 100ml of petrol.

But about a million years ago, man stumbled across fire. As a result, the energy available to us increased because now we could keep warm not just from what we ate but also from burning. So this added energy usage improved our standard of living and improved our comfort.

Some thousands of years ago, our energy usage increased still further when we domesticated animals. Animals could labour in our place or in some societies slavery increased the work done per “citizen”. Those labourers had to be fed. That food was like petrol in our cars and  our energy demand increased alongside increased prosperity.

So, even before money, energy was adding to prosperity in the same way as now but without money. We had an economy based not on money but on work and energy. The unit of exchange wasn’t money but energy mostly in food. I call this an: “Enerconomy”.

GDP is energy

But the enerconomy is more than something like the economy. As the graph below shows (fig 1) world GDP and world energy show a high degree of correlation.

Fig 1: World Energy. (in exajoules) versus world GDP (scaled to fit)
Energy use includes figure for wood burning.

The red line for world GDP closely follows the line for energy usage in green. (You might like to compare this to the global warming curve & CO2 fit shown at the end of this article) The graph above shows that over a very long time world GDP and energy usage have risen at the same rate.

Fig 2: Change in world GDP against change in energy usage

But as the graph above shows (fig 2), when we look at the detail of year to year changes in GDP, we see these are matched by changes in world energy usage. As world GDP (blue) rises and falls, total world energy use (pink) also rises and falls in sync. This strongly suggests the two are closely related.

Fig 3: GDP per country versus energy usage

And when we look at each region we see the same pattern. Looking at fig 3 above we see that GDP per capita rises the more energy each country uses.This shows that:

for all reasonable purposes Energy is a proxy for world GDP.

In other words if GDP rises, energy rises, or if energy usage rises then we should expect GDP to rise.

Fig 4: Changing energy use and GDP for selected countries

And yet again we see in fig 4 above that there is a natural increase in energy use as countries increase GDP. But why shouldn’t the relationship be the other way around? Could rising energy availability lead to rising GDP? In the same way that having more wood gave humans a better living standard 1milion years ago and domesticated animals and windmills all made our lives more comfortable, doesn’t coal, electricity and petrol do the same for us today?

Fig 5: Cost of materials against energy in production

And as fig 5 above shows, there is a very close relationship between the energy used in producing materials and the cost of the raw material. These raw materials are combined with others, in manufacturing processes using energy, in transport that uses energy, in vehicles produced from raw materials whose cost is directly related to energy – and all that energy adds to the cost of what we buy so that as the total energy used in producing, distributing and selling items increases so does its cost. This seems to suggest that:

Energy use does not increase as a result of rising GDP,
but rising GDP and rising energy use are the same thing!

The problem with Green economics – destroy the economy to “Save the planet”

It has been long known that we cannot have GDP growth without growing the availability of energy. Usually, the argument is: we must reduce economic activity to “save the planet”.

But what happens when we try to reduce energy usage? In recent years, countries across the globe have been trying to reduce CO2 emissions by cutting their energy consumption and by switching their energy production. Looking at energy use of the the USA, China, India and the EU from 1980, only the EU has seen a drop in in CO2 from energy usage

Fig 6: Energy Usage of USA (brown) EU (blue) China(Orange) India (purple)

And what has been the effect on GDP?

EU energy and GDP have gone down.

Is this another example of the link between energy usage and GDP? It seems so from the way fig 6 (above) shows a drop in EU energy usage and fig 7 (below) shows a similar drop in EU GDP . The polices that try to reduce energy appear to either go hand in hand with reducing GDP, or reducing energy is CAUSING reducing GDP.

Fig 7: GDP (inflation adjusted) for USA (blue) & EU (orange Kyoto signatory) and India (yellow) & China (yellow) which were not obliged to cut CO2 under Kyoto

The problem with green economics – Energy saving schemes don’t work

The reason for this is obvious when we understand that energy and money are two sides of the same measure. Unless we understand that energy usage cannot be reduced without reducing GDP we don’t understand why schemes for “energy efficiency” will not reduce energy usage overall. This is because in practical terms, all “energy efficiency” does is to reduce our energy usage and save us. Do, e.g. insulating our homes does, reduces our energy bills and appears to reduce energy usage, but it also saves us money. Then what do we do with this extra money? We spend it …. on goods which require huge amounts of energy to produce, transport, heating for shops, etc., so that when we take it all into account, the increase in energy from that extra spending power matches the energy we thought we had saved. So … just the same amount of energy is used … just in a different place.

The reality of energy and economics – money is stored energy

Rising GDP means we can all afford to buy a bigger and bigger basket of the typical goods. Those goods take energy to produce. For food, that energy is largely natural. For manufactured goods, most of that energy is from fossil fuels. The energy used to produce goods – the “stored energy value” of e.g. a “Mars bar” or an apple, or even a simple steel knife, set by energy costs in manufacture. Whilst energy use may vary between manufacturers, in a free market, all other things being equal we choose the lowest cost goods. The cost of goods is largely determined by the energy use. In a free market therefore we choose the goods using the lowest energy to produce.

From this I think we can draw three conclusions:

• In a free market, the cost of any good largely reflects the energy used in producing that good.

Therefore because free markets encourage the lowest priced goods:

• In a free market, the energy used in producing any good is minimised.

The cost of energy, whether food like wheat, oil, coal or wind is mainly determined, by the goods used in producing the means to harvest the energy (like the windmill) and the process of harvesting it. And as the price of those goods (like steel for windmills) is largely determined by the energy used in their production it is almost certainly true that:

• If any energy source (per unit delivered) costs significantly more than the average market price for energy, then that added cost shows us how much extra energy is being used in delivering that energy source. 

So when governments subsidise generation of energy,  such as wind, wave and tidal so that the producer gets far more than the actual price of energy, as determined by the free market for energy, what this added cost represents is a higher energy usage in producing that energy source than economic energy sources.

We often hear the assertion that “wind is free”. This is either complete nonsense or just a statement that coal, gas, water, gold … are all “free”, in the natural state. What costs is harvesting them. The costs of harvesting subsided energy generation like wind is higher because far more energy is used to build the machinery and run the transmission lines, which all adds to the cost of the “free” energy in its natural state.

And for these subsidised technologies, like wind, it is quite likely the energy delivered is significantly less than the total energy consumed in harvesting and delivering that energy. That would mean they use more energy than they produce!

Rather than a free market being wasteful … free markets are the best way to ensure maximum energy efficiency. Distortions to the market tend to reduce both energy and economic efficiency. They may be tolerated in the short term if there is perceived to be a longer term gain from market intervention (usually by government).

But what are the EU doing? They are not reducing energy usage by energy efficiency, because any money saved is just spent on other things which use as much energy, and they are not saving energy, because they are forcing people to take energy from the less efficient and therefore higher cost energy sources. Instead, they are cutting energy use as the economy of Europe collapses because European industry can no longer compete with countries where energy prices are not artificially raised by senseless “green” policies.

The problem with green economics – CO2 is not a problem

Global temperature has not risen in last 15+ years. Severe weather has not increased. CO2 is an essential plant food which increases agricultural output. Moderate warming as we expect from the greenhouse effect of the small increase in CO2 is overwhelmingly beneficial … as anyone with a greenhouse will know! … particularly in Scotland.

How to revitalise the Scottish Economy:

1. Stop politicians interfering with the cost of energy. Even if CO2 were a problem, because wind is so expensive, it is almost certain that more CO2 is produced as a result of this policy than without it.
2. Stop wasting our money on wasteful wind.
3. Stop trying to reduce energy usage
4. Encourage fracking
5. Encourage nuclear fusion.

END

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Appendix: good and bad correlation

The relationship between CO2 and global temperature is an excellent example of two measures that are said to have good correlation. This is because as shown in fig 8, like world GDP and energy, the CO2 and temperature, when scaled up appear to follow each other.

We have all heard it said that some people are “certain” man-made CO2 caused the 20th century temperature rise. So how does this compare with the correlation between world energy and GDP? As the graph below shows, the relationship between energy and GDP is far far better. The GDP-Energy graph is a close fit. The temperature-CO2 graph (as shown) is a poor fit and e.g. there are massive problems with the 1940s peak that cannot be explained by the CO2 graph (as drawn).

Fig 8: Caution: The match of the CO2 and temperature graph above is somewhat deceptive. Since one is temperature and one is CO2

So it is not exactly convincing.

However, even though this is unconvincing, the the graph above a lie.

The graph is bogus

The graph is in fact entirely bogus for the following reasons:

• no reliable CO2 data before 1958, so that portion of the graph is entirely fiction.
• Effect of CO2 is much smaller than suggested.
• Actual rise due to CO2 greenhouse warming is as shown below (blue line).
• The graph breaks down after 1998 as shown by my graph on the right.

If the graph had shown the actual greenhouse effect of CO2 it would look more like the graph below:

Fig 9: Real relationship – not known before 1958 and much less after

And as the graph below shows around 2000, the relationship broke down completely as the global temperature stopped warming whilst CO2 continued up.

Fig 10: … and relationship breaks down after 2000