OIL AND GROWTH - Cardiff Business School

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ECONOMICS AT THE END OF THE END OF
HISTORY:
NAVIGATING THE ENERGY TRANSITION
PROF CALVIN JONES
CARDIFF BUSINESS SCHOOL
FRIDAY WORKSHOP
02.11.02012
USUAL CAVEAT
No paper, sorry, very much a work in progress.
HYPOTHESIS
(1) Global growth may be slowing due to
attainment of a Solow steady state of percapita-income driven by diminishing returns to
energy-generating fossilised natural capital
(2) Transition to non-exhaustible energy inputs
will (especially in the West) be sub-optimal
Maddison quoted in Van de Berg,
4
LONG RUN GDP GROWTH
SKETCHED MODEL: EXTENDED SOLOW
Solow (1956) growth model posits 2 factors, L , K
with constant returns to scale and diminishing
returns to any one factor
Growth is series of ‘one-offs’ achieved only via:
• labour augmenting improvements to capital
stock (Arrow, Romer, Lucas et al)
• increase in savings ratio
• Reduction in depreciation rate of capital
SOLOW GROWTH EQUILIBRIUM
To right of k*, δk > s
hence amount of capital
per worker diminishes to
k*
y
δk
To left of
δk < s hence
capital accumulates to k* y’
k*,
e.g. decrease in
depreciation δk
increases PCY to y’
y*
δk’
s = σβ(k) α
k
k1
k*
k2
k’
6
There is a stable
equilibrium capital stock
and income per worker
level at k* y*
y = β(k) α
EXTENDED SOLOW*
Consider extension of Solow with new factor of
production E representing exergy – amount of
energy available for useful work
Cobb-Douglas; Y = KαLφ
where α+φ=1
becomes:
Extended Cobb-Douglas; Y = KαLφEψ where α+φ+ψ=1
Allow K & L to be infinitely extendable in tandem and
hence collapse term to
y
y = β(kl) αφ
y = β(kl) αφ
kl
*n.b. I depreciate Hotelling/Hartwick/Solow papers that equate rents on exhaustible resources to stock
values due to informational & other imperfections discussed later; see Krautkraemer, 1998
EXTENDED SOLOW*
Implication that growth will experience
diminishing returns to increasing inputs of K and
L if available system energy, E is fixed
Notes:
• We do not distinguish here between fossil and
renewably generated energy
• Energy efficiency developments increase exergy
hence shift function up – but themselves
y
experience diminishing returns
y = β(kl) αφ
kl
DIMINISHING RETURNS TO ENERGY
EFFICIENCY
EXERGY LEVELS?
Response to this analysis might contend exergy
sufficiently available such that does not
constitute a drag on economic growth – hence
increasing factor accumulation + technical
progress sufficient to allow (but not ensure)
growth
Abundant energy sources waiting to be tapped
when price justifies exploitation (see work of
Maugeri & Yergin especially)
Any signals here?
EVIDENCE
SUPPLY CONSTRAINTS?
NEXT?
Fatih Birol, Chief Economist of the International Energy
Agency, September 2010 interviewed on BBC One Planet
"It is definitely depressing, more than depressing, I would say
alarming, which is what we try to do, to alarm the governments.
… even if we were to assume the next 20 years global oil
demand growth was flat, no growth at all, in order to compensate
the decline in the existing fields we have to increase the
production about 45m bpd just to stay where we are in 20 years,
which means to find and develop four new Saudi Arabias, and
this is a major challenge.
INTIMATIONS?
Lack of positive supply response from
conventional oil since 2005 suggests limitation in
annually available exergy from that source – for
technical/cost of production reasons
Substitution effects – nuclear, unconventional oil
(tar sands), biofuels, wind… and in short term gas
All are an order of magnitude more expensive
than ‘easy’ Saudi oil at $8 - $12 at barrelhead
(Simmons, 2006) and with little prospect of scale
economies to to techniques of extraction –
cheapest is boiling Western Canada @ $80/ba
(see Nelder)
NOT JUST PRICE ISSUE - EROEI
Energy Return on Energy Invested – technical coefficient
dividing energy generated by energy used in discovery,
production & distribution processes over life cycle
OIL AND GROWTH
Even if global exergy can be increased EROEI
implies far higher cost of energy
This either in terms of $ - e.g. OECD, 2012
estimate real price of oil doubles to 2020
(accounting for new discovery & substitution)
Or in terms of opportunity cost – ever larger
proportion of productive factors dedicated to
chasing ever more marginal energy sources
Additional problem here – exergy is also an input
for application of K and L – it is an ‘ur-commodity’
see Schumacher)
OIL AND GROWTH
oil comprises around a third of global primary energy
use, and 95% of global transport. Oil-derived products,
including plastics are central inputs to wide range of non
energy products
Dependence of global agriculture on oil for mechanised
production, pesticides, inorganic fertilisers and
distribution means in US & Europe, one calorie of food
requires 7-10 calories of fossil fuel to produce Heller
and. Keoleian (2000)
Manufacture of a passenger vehicle cf. 22-29 Gj of
energy, cf. 3.75-5 barrels of oil (Weiss et al 2003, MIT)
Hence ↑ energy cost implies ↓ in productivity of inputs
(opportunity cost of exergy)
OIL AND GROWTH
Increasing production cost (exergy terms) & substitution
to energy sector cuts factor levels in productive sector
Hence leftward shift in kl and downward pressure on PCY
y
y = β(kl) αφ
kl
Can we hope for offsetting improvements in energy or
non-energy technology?
‘… the Stone Age ended, not because we ran out
of stones. It’s ideas, it’s innovation, it’s
technology that will end the Age of Oil before we
run out of oil.’
Sears, 2010; see also Deutsche Bank
http://www.ted.com/talks/lang/en/richard_sears_planning_for_the_end_of_oil.
html
PROBLEMS & SUB-OPTIMAL
TRANSITIONS
Formal (western)
economics not used to
explaining transitions to
‘worse’ factors!
Newcomen’s Coal engine
1712.
Adam Smith born 1723
Batteries must improve
carrying capacity by a factor
of 50 to match oil – but
fundamental chemical
constraints & DMR
NETWORK/SUNK COSTS
e.g. transportation:
- electrification: battery cars. smart 2-way grid.
high power charging points. 2 x generating
capacity (MacKay 2009)?
- hydrogen: fuel cell cars. storage tanks &
tankers or pipelines.
- gas: LPG / CNG cars. below ground (?)
pressurised storage (but not hydrogensubstitutable). definite shelf life.
AND OF COURSE IN EXPERIMENTAL
TRANSITION, DEPRECIATION RATES LIKELY TO
INCREASE?
δk’
y
δk
y = β(k) α
y*
↓
s = σβ(k) α
y’
k
k*
22
k’ k1
MORAL HAZARD / PRINCIPAL AGENT
incentives to stifle information flow on reserves (or overstate) from within industry / producer-nations to shore up
demand & lock-in (see Lewis, 2010 for case study of US
finance)?
NON-ECONOMIC (OR JUST NON-)
DISTRIBUTION OF EXERGY
Sino-supplier joint ventures (nascent) hint at future
geo-political not price based distribution? (Not that the
West will afford it anyway!)
EQUITY & GEOGRAPHY
160.0
2.50
140.0
2.00
120.0
100.0
1.50
80.0
1.00
60.0
Residence Based GVA/Head 20061
40.0
0.50
Total final energy consumption (kWh)/ £GVA
20.0
0.0
0.00
Greater
London
South
East
East of
England
South
West
Scotland
East
West
North
Midlands Midlands West
Yorkshire North
and the
East
Humber
Wales
FINAL THOUGHTS: ENERGY CAPTURE
14,000BC – 2000AD
Morris (2010) Why the West Rules: For Now
ENERGY CAPTURE: 14,000BC –
2000AD
Morris (2010) Why the West Rules: For Now
ENERGY CAPTURE: 14,000BC –
2000AD
Morris (2010) Why the West Rules: For Now
CONCLUSIONS
Issue at hand is not oil ‘running out’
But rather extent to which limitations in supply growth of
fuels (& technically driven increased marginal cost) will
influence extent of economic growth – or indeed force the
continuation of de-growth (in West)
Very imperfect competition in energy markets unlikely to
help smooth transition to non-exhaustible fuels
Significant social tensions evident (Mexico city food riots,
fuel strike, real-wage effects of increased commuting cost,
fuel poverty) suggest socio-political resilience may be
more important than economic/factor price considerations
in driving transition
THANKS FOR LISTENING.

“It might be said that energy is for the
mechanical world what consciousness
is for the human world. If energy fails,
everything fails.”
e.f. schumacher
small is beautiful p99
Prof. Calvin Jones
Cardiff Business School
[email protected]
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