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Saturday, September 22, 2012

Energy Economics - Figuring the Correlation Between Energy & GDP Growth

  UKIP's new paper from Energy spokesman Roger Helmer is out. Bishop Hill, while pointing out that "the Tories are dragging their feet while UKIP are racing ahead"on shale gas and that it would undeniably lower prices enormously says

"While the Conservatives are trying to replace the free market in energy generation with something resembling the CEGB of the 1970s, UKIP seem quite happy to endorse economic liberalism."


Which makes it serendipitious that I have been pointed to a discipline called Energy Economics by Valcav Klaus.

  This is the journal of the field

  And this is from the abstract of a recent paper:

"This paper examines the relationship between capital formation, energy consumption and real GDP in a panel of G7 countries using panel unit root, panel cointegration, Granger causality and long-run structural estimation. We find that capital formation, energy consumption and real GDP are cointegrated and that capital formation and energy consumption Granger cause real GDP positively in the long run. We find that a 1% increase in energy consumption increases real GDP by 0.12-0.39%, while a 1% increase in capital formation increases real GDP by 0.1-0.28%."

  I have previously said that there is multi-decadal experience of a 1:1 correlation between energy/electricity growth and economic growth in free market economies world wide so a 0.12-0.39 (average it at 0.26) doesn't look that good but look again.

  That is the direct, proven, initial cause. A country whose economy is growing is going to have more money for capital formation so that will feed through. A country which is getting that much better off means everybody is really better off and will create a multiplier effect - this is the real thing to be compared with the false multiplier all the self styled "Keynsian" politicos are always talking about when they call for more "quantative easing"/printing of money. Put those both together and the overall multiplier effect is more likely to be expected above than below 1.

   But look at it a second time.

"a 1% increase in energy consumption increases real GDP by 0.12-0.39%, while a 1% increase in capital formation increases real GDP by 0.1-0.28%."

The average growth caused by capital formation [ie investment in industry, infrastructure -  overwhelmingly the principle conventional econiomic explanation for growth] only averages 0.19 while the average initial effect of  increasing energy use is 0.26. Nearly half as much again as important.

 While China's electricity production has gone up 10% a year for 30 years and its GDP has rien by almost exactly the same amount, ours

2004  2,718 total  371 electricity

2007  2,458    "     373     " 

2008  2,424    "     372     " 

2009  2,288    "     352     "

Change 2004-2009  -15.8 % total energy, -5.3% electricity use

  No wonder we are in recession. It was held off by running up a deficit  but basically we should expevt it to be somewhere between 5% & 15% and in fact since 2008 we declined about 6%  - which suggests we have a bit more to fall, which is confirmed by the fact that we are still in deficit & not growing.

  We will not get out of recession if the government keep preventing it by pushing up energy prices, indeed we should expect the recession to get worse. But we would change that any time the politicians allow it.

   Bear in mind that shale gas is far cheaper than our conventional gas, that 3/4s of the cost of nuclear is regulatory and that even so they are both far cheaper than the windmillery the government enforces on us. I have previously calculated on this basis that only 7% (pessimistically calculated) of electricity cost is what it could cost if we allowed the free market to choose shale and nuclear..

By all the rules of economics we ahould expect that if we allowed a free market in electricity production would go up a minimum of 14 fold - probably considerably more since when costs go down the amount of money earned normally goes up rather than just staying still.
Taking a 1:1 ratio that would mean a 14 fold increase in GDP. Even taking the minimum (no multiplier effect) of 0,25 GDP would increase 4.38 times. OK it would take a number of years to achieve it but so what?


  Incidentally I have previously discussed the problem I have, as a libertarian, with the fact that between 1925 and 1937 the Soviet command economy grew at 10% a year and explained it as a result of its electricity production growing at 23% a year. Multiplying 23% by 0.26 shows that in the circumstances the Soviet economy couldn't help growing at 6% and that Stalin must have considerably mismanaged the show to produce such a small multiplier effect (or produced compensting negative effects from shooting people) that the total growth could only be pushed up to 10%. The negative effect of socialist dentral planning was more than offset by the positive effect of  the Marxist, at that time, enthusiasm for technological progress.

    On the third hand he did do better than Blair, Brown and Cameron. 

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