The Energy Roller Coaster

We are heading for economic disaster and the very steps we are taking to turn the economy around will result in an energy crisis. Which in turn will trigger another economic collapse. Is there any way off this treadmill?

I certainly don’t have the answer, however I think it is critical to recognize that energy issues are a leading cause of the current economic crisis. Unless we take this opportunity to make significant changes, further recessions will be inevitable and each will be larger than the one before. In fact, if we are going to move to alternative means for energy production then it is vital we start this process while we still have enough conventional energy to take on significant manufacturing and construction projects.

On the plus side, I am confident that real changes can be made that will reduce the negative impact of declining oil and gas reserves. In fact, we can look to the recent past for clues on how we might move forward. The industrialized world faced a significant energy crisis in the mid 1970s. America’s domestic oil reserves were declining and no longer able to keep pace with increasing demand. North America and Europe were becoming increasingly dependent on imported middle Eastern oil and in the midst of this transition, the political situation resulted in an Arab oil embargo. The USA and Western Europe were devastated. Line-ups at gas stations were common place. Layoffs were common-place in manufacturing industries. Inflation skyrocketed due to the effects of increased energy costs and currency devaluation (the West had recently abandoned the gold standard).

In response, US President Jimmy Carter pioneered sweeping changes in energy policy. His policies promoted extensive development of alternative energy systems (including synthetic oil production from coal, solar electricity production, wind power, etc) and energy conservation (including improved fuel efficiency standards and a nation-wide 55 MPH speed limit). However, when the political crisis resolved these “restrictive” energy policies were abandoned and America’s energy usage quickly returned to even higher levels than it was before the crisis.

This was not the case in Western Europe. North Sea oil production was spurred by higher energy prices and the Norwegian government implemented innovative regulatory policies to insure maximum production from their oil fields. Denmark made a serious commitment to energy self-sufficiency. Oil and gas was heavily taxed and the resulting revenue was invested in public transportation, wind energy development and innovative electricity generation. Energy conservation measures were heavily subsidized and promoted for public buildings and private households. Artificially higher energy prices, combined with the popular incentive programs resulted in a transformation of the Danish economy. Similar measures, to a somewhat lesser extent, were implemented by most of the countries in Western Europe.

One way to measure the effectiveness of these policies is to look at the Energy Intensity, or the Total Energy Consumption (in Tons of Oil equivalent) per unit of GDP, ranking of North American and European countries. Currently USA consumes 221.7 Tons of Oil equivalent to generate $1,000,000 of GDP. Canada is even worse at 293 TOe for $1 M GDP. In contrast, Switzerland, Denmark, France, Germany and England only require 122.3, 133.2, 170.5, 163.9 and 141.2 respectively. While it is easy to contend that higher energy consumption is necessary to have improved living standards, it is also difficult to deny that the average Swiss or Danish citizen enjoys a quality of life that is favorably comparable to the average Canadian or American. Some people argue that smaller countries have an advantage because of lower transportation requirements. This is difficult to justify when Australia comes in at 208, and nobody has a bigger country and spread out population than they do. Colder countries also have a disadvantage, but Norway manages to come in at 172 vs Canada’s 293. As another comparison, the largest energy consumption per $1 M GDP is Zambia at 730. In reality, they really don’t use much energy. They simply have a very poor GDP.

The countries of Western Europe don't really have any unfair advantages, they just use energy more efficiently. For example, the US vehicle fleet averages around 22 mpg. The German auto fleet is close to 44 mpg.

If the North American economy is going to fully recover without causing a worldwide energy crisis, there are going to have to be substantial improvements in the way we use energy in our daily lives.

PS: Just found this link http://finance.yahoo.com/tech-ticker/article/220827/Oil-Price-Spike-Coming!-Oil-Price-Spike-Coming!?tickers=OIH,XLE,XOM,CVX,BP