Sunday, 27 February 2011

Why The Economist doesn't understand energy

The following image is from The Economist which argues that the use of energy is being reduced as measured by Energy intensity of the economy (percentage of GDP).

An astute reader of energy physics and economics should understand the obvious failings of the above diagram for any argument about energy intensity of economies:

  1. The graph measures energy use per GDP unit, whilst including all of the financial GDP. However, financial GDP is pure speculative money, consuming very little energy, but also contributing very little to society. Further, using USA as a proxy for most OECD countries, financialization of the economy has been growing steadily for several decades now. It should be cleaned from the GDP to get a more meaningful measure of 'energy use per unit of GDP in the real productive economy'.
  2. The energy consumption is based on figures from BP, which does not account for grey energy imports. Grey energy imports have been rising for all OECD and lately even for developing countries. They can account for up to 25% to 30% of total energy consumption. If not included, the figures can be seriously skewed, especially for developed industrial countries within the OECD.
  3. The correction to GDP figures (PPI 2009 level) has probably been done using CPI figures. We know from energy consumption figures, growth of monetary aggregates  and statistical corrections done in the CPI calculations (i.e. hedonistics) that these figures are unreliable: they are likely to understate the inflation, thus overstating economic growth in real terms.

However, the most obvious and glaring misuse of the following graph to argument in favour of energy not being a problem for economic growth is thinking that GDP growth solves energy consumption growth. Make no mistake, absolute energy consumption is and has been going up (the only exception years being those of deep recessions). The energy consumption growth has just been relatively slower than the skewed GDP figures The Economist used above.

After all these minor statistical quibbles, the main problem is not the relative scarcity of energy sources to economic growth, but absolute consumption growth and absolute limits. Anybody with a half an hour's worth of reading in ecological economics should understand this immediately.

If energy consumption per capita as a % of GDP was the only problem, then we could avoid the rolling energy crisis by nationalizing everything and raising hourly wages for everyone by controlling prices. This would show up as increased GDP, near zero inflation and the amount of relative energy consumption to GDP would to go down.

That’s the theory anyway, if one is stupid enough to believe the misleading propaganda from The Economist.

Think for yourself. There is no substitute for it.