How does energy relate to the overall economic performance of a country?

marginal social cost marginal private cost marginal external costs

Market

  • A system that allows for multiple parties to participate in exchange
  • We have several energy markets
  • The free market rests on several assumptions that are not true in practice

For all their power and vitality, markets are only tools. They make a good servant but a bad master and a worse religion. - Amory Lovins, Natural Capitalism

Market Response Model

Predcts that scarcity raises prices resulting in decreased demand or increased supply

  • Improved techniques can lower prices and increase supply
  • Natural Gas Hydraulic Fracturing is an example

Externality

A cost or benefit borne by everyone from one person’s decision

Definitions

  • Gross Domestic Product (GDP)
    • Monetary value of all goods and services created by an economy.
  • Per capita GDP (GDP per person)
    • The GDP of an economy divided by the number of persons in that economy.
  • Per capita energy use (Joules per person)
  • Energy intensity of GDP (Joules per GDP)

Energy and GDP

There is a correlation between energy use and the gross domestic product in countries.

Energy vs GDP by country

US GDP

  • 2006
  • GDP 14 trillion USD 14 \cdot 10^{12}
  • Population 300 million
  • Energy use 100 Quads

Energy per unit of GDP

We can think of energy intensity as a form of efficiency. How much energy does it take a country to create economic value?

Source: The Economist

Energy and the Human Development Index

Energy use is correlated with quality of life in many countries. However, improvements in this quality of life (HDI) level off at higher levels of energy consumption.

Energy per capita

The Resource Curse

Experts have observed that discovering petroleum wealth in a country often doesn’t lead to better economies or health for the country. This idea is called the resource curse.

Several countries that have oil as a significant fraction of their economics have low ratings for the HDI and democracy.

Solar Learning Curve

Supply and Demand

Subsidy and Taxes

If we want to change the amount of a good or service that is provided, we must change the intersection of the supply and the demand curves.

We do this by lowering or raising the price of a good.

For example, if the government creates a carbon tax, the price of gasoline will rise, and there will be less gasoline sold and less carbon emitted.

If instead we want more electric cars, the government can provide a subsidy to electric cars that lowers the price and the market will produce more cars.