In spite of growing interests in the interrelationship of energy and economic growth and its emergence into the front rank of policy issues, there is a striking absence of solid information on its history and on the more tenuous question of its prospect for the future.
Some years ago, a detailed quantitative study of the interrelationships between energy and economic growth found that, between the latter half of the nineteenth century and the first decade of the twentieth century, energy consumption in the United States increased at a faster rate than GNP, while following the end of World War I the growth in energy consumption had generally been at a slower rate than the growth in GNP. These findings do not support the widely held belief that energy and GNP have grown at the same rate in advanced industrial countries. Not only did they not grow at the same rate, but their comparative rates also show divergence in different directions depending upon the particular period of economic history.
This finding was subjected to deeper probing in order to explain the trends for the different time periods. It was found that a major factor for the rise in energy relative to GNP during the earlier period, and its decline relative to GNP in the later period, was to be found in the changing structure of output of the economy. Whereas the first was one in which the development of heavy industry was the dominant element in economic growth, the period following was one in which lighter manufacturing and the broad service components of output were growing rapidly. The heavier energy consumption was thus associated with the stronger-influence of heavy industry, while the comparative decline in energy relative to the national product was due to the less energy-intensive service sector and light manufacturing.
In addition to the change in the composition of the national output, another major influence during the period of declining energy consumption relative to GNP was the change in the composition of energy output. Of particular importance was the rapid growth of electricity than of other elements within the energy total. From 1920 to 1955, electricity grew five times faster than all other energy.
Two points about the impact of electrification reveal major aspects of energy and economic relationships are frequently overlooked. They are, however, essential to a proper understanding of the role of energy in economic growth. One point is the question of thermal efficiency as compared with the economic efficiency of energy use. There is a school of thought concerned with what is called “net energy use”. In this approach, attention is paid to energy balances : how much energy is put in compared with how much useful energy is obtained. This is a useful exercise, but it can convey a misleading impression. Thus, in net energy terms, electricity might be regarded as an undesirable energy form because it requires several units of fossil fuel to produce 1 unit of electricity. However, in economic efficiency terms, which is the decisive factor to consider, electricity has been a desirable energy form, because its unique characteristics have permitted the performance of tasks in altogether different ways than if fuel had to be used directly as a source of energy.
The impact of electrification on industrial processes is the clearest case in point. A significant aspect of electrification was its effect on the overall production efficiency of the economy, particularly in the manufacturing sector. An historical examination of the organization of production within manufacturing shows that the growth of electrification permitted the organization of productive processes within the factory in such a manner that was impossible when factories were powered by prime movers with shafts and belting carrying mechanical power to the various points of use. Electricity, which made possible the use of electric motors to which the power was delivered by wires, paved the way for a major reorganization of the sequence and layout of production more in keeping with the logic of the production process than with the more rigid locational requirements imposed by a system of shafts and belts (requiring, for example, the location of heavy energy user close to the prime mover). This was a matter of enormous importance in the growth of manufacturing productivity and thereby in the productivity of the total economy.
Beyond its key part in industrial processes, electricity also has been of importance in communications, automatic controls of various kinds, and in the performance of numerous household tasks, to cite but a few examples. The different applications made possible by electricity have multiplied the efficiency with which labor and capital are employed, and thereby enhanced the overall productivity of economic processes. Thermal efficiency considerations notwithstanding, the economic efficiency of electrification has been of outstanding significance.
The second point is that because of electrification not only was the overall productivity of economic processes enhanced, resulting in greater output of goods and services per unit of labour and capital employed, but, the productivity of energy use was enhanced, resulting in a decline in the amount of raw energy required per unit of output. In this sense, despite the heat losses involved in its generation, electricity has also enhanced the productivity of energy use, as measured by the ratio of GNP to energy consumption. To repeat, it has done this not because it is thermally efficient but because it is economically efficient.
This is not to suggest that greater thermal efficiency in the generation of electricity has not been significant in the historical record. Indeed, there have been vast improvements in the efficiency with which electricity has been converted from fossil fuels. And there are opportunities for still greater thermal efficiency in the future. Nor do we mean to suggest that electricity is an appropriate energy form for all types of use-comfort heating may frequently represent an undesirable application. However, in historical perspective, electricity has left its mark despite, not because of, its net energy characteristics.
Similarly, it may be reasoned that the internal combustion engine, powered by liquid fuels, permitted the substantial mechanization of agriculture which played so great a part in rising productivity. The growth of truck transportation made possible the movement of industry away from sites dictated by the location of railway facilities or waterways. It is not through its thermal efficiency characteristics, but in its broader economic impacts, that the internal combustion engine has left its imprint.
Thus, the change in the composition of energy output toward the more flexible forms of electricity and gasoline made possible shifts in production techniques and locations within the industry, agriculture, and transportation which greatly enhanced the growth of national output and productivity. In raising the efficiency with which labour and capital are employed, the changes in the composition of energy output have also enhanced the efficiency with which energy has been employed, as a factor of production; that is, the relationship between GNP and the consumption of energy is characterized by a persistent trend of declining energy consumption per unit of national output.
What this course of development has signified for the growth of jobs is a point worth considering a bit more explicitly. The interrelationship of energy consumption and employment in the process of economic growth displays certain distinct and intuitive features in a macro-economic and long-term historical context. In a disaggregated and shorter-term perspective, the picture is more elusive. The proposition that labour productivity is sensitive to the availability of energy-using capital equipment as a complementary productive input shows up in the close historical movement of energy per worker and output per worker. Of course, the curves of these two series are not proportionate. Indeed, the more rapid rise. in output per worker than in energy per worker points to the innovation of industrial mechanization and electrification in connection: with the declining energy/output ratio.
But one cannot draw the inference from these long-term trends that decrease in energy use, leaving out the reduction stemming from increased efficiency, necessarily jeopardizes the prospects for future productivity growth. At least 40 percent of energy consumption represents as much the proceeds” of income growth (which persons use on such things as passenger transportation and household fuels and power) as it does for growth through its role in the productive process. In other words, no more than 60 percent of yearly energy use goes to the business sector–industry, freight transportation, agriculture, and commercial uses.
For the same reason, in spite of the similarity of movement in energy consumption and employment in the long term, it seems questionable to assert a strict linkage between these two, at least not without probing underlying factors in the relationship. A given shortfall in gasoline supplies, whatever its siege-economy characteristics, is not job-threatening to the extent that the same deficiency in industrial fuel availability would be to the assembly line worker.
These instances make the point that an understanding of the relationship between energy, economic growth, and employment requires a deep probe in relation to the structure of the economy and the pattern of energy output. It is in these changes that one begins to see more clearly the two-way relationship between energy and economic growth : energy consumption as it is affected by the composition (and not just the level) of national output, and the level of efficiency of output as it is affected by changes in the ‘structure of energy output. Both are of importance to a proper appreciation of energy’s relationship to economic growth.
Of what value are these findings in assessing the future? One factor that has been highlighted as an explanation of the past experience is that of structural change. Now, if as many believe, the economy of the advanced countries will in the future shift ever more heavily in the direction of services, there is some reason, using history as our teacher, for believing that energy relative to GNP will continue to decline and, perhaps, at an accelerating rate of decline. This would be the energy counterpart of what has been called “post-industrial economy.”
However, a word of caution is called for. Services are a heterogeneous category of activities, and some of them may be energy-intensive. Consider, for example, leisure-time activities, which will in the future account for increasingly larger percentages, of the personal services which consumers will demand. It is not unusual in the United States for people to travel great distances by aeroplane or automobile to have a skiing weekend, or to engage in other types of leisure activity which require substantial travel. This is obviously a high energy-intensity form of services. The construction of homes, and the travel required to go from the city residents to the weekend residence may both turn out to be comparatively high in energy intensity. We mention these types of developments only 10 make the point that one should not too easily fail into believing that the growth of non-industrial activities in the future will necessarily be associated with lower intensities of energy use.
One insight into unfolding energy-consumption patterns is provided by a picture of the energy-using characteristics of different income groups. If the share of household budgets devoted to energy fell as families entered higher-income classes, one would be tempted to suggest that, whatever else occurred, rising affluence implied a less-than-proportionate increase in energy demand. In fact, it has been estimated that energy consumption does rise in line with income as households pass through successively higher income brackets. True, relative utilization of direct energy-motor petrol, residential fuels, and power—drop off as income grows. But this is apparently more than oil set by the rise in indirect energy which is embodied in purchases of non-energy goods and services. An unanswerable question is what will happen to the spending patterns of those currently the high-income brackets. That aspect of future behavior involves pure conjecture.
Another factor that needs to be stressed in interpreting the historical record is that the long period examined was one in which energy prices were falling relative to the prices of other production factors. Thus, price movements served in favour of the substitution of energy for other factors of production. In the future, however, energy prices are expected to be rising relative to the prices of other factors. It may, therefore, be correct to expect that the use of energy will decline relative to that of other factors of production. Clearly, the whole question of energy demand and its response to price change, both up and down, is one which requires investigation.
It is also reasonable to expect that the dampening effect of rising energy prices on the growth of demand will be helped by advances achieved in energy-use technology. There are undoubtedly a number of energy-saving developments, not necessarily easy to foresee in detail, which will flow from technological response to higher prices of energy and to institutional and other reforms designed to achieve conservation. Just as declining energy prices in the past encouraged the growth of energy-using machines and appliances, so price rises in the future should result in the development and use of energy-saving equipment of various kinds.
A better understanding of the combined effects on the growth of future energy consumption of structural changes in the economy of relative price increases in energy, and of changes in energy-use technology in response to rising energy prices is needed if we are to achieve a dependable basis for projecting energy needs relative to future economic growth. Unfortunately, the historical record for any particular country may be quite inadequate. Consequently, international comparisons of the use of energy should help in assessing the responses of energy consumption to differences in energy prices, and also to differences in economic structure and in the energy-using technologies employed.
An ongoing effort of this kind which is nearing completion in draft form, points to a complex of factors determining relationships between energy use and economic activities in different countries. There is a range of other considerations which will need to be taken into account in assessing the energy-economic growth relation for the future. These arise in the sphere of public policy and social attitudes; and do not readily lend themselves to quantitative study.
There appears to be a growing tendency in public policy to want energy conservation or to encourage it through the use of various types of incentives. The lasting imp: of such regulatory and institutional factors in altering the relationship between energy and economic growth is difficult to foresee. It is necessary to consider the matter of how changes in social attitudes may affect energy-economic growth relationships. This subject generally goes. under the name of “changing lifestyles.” It is difficult to give a description of what this covers because the term means different things to different people.
However, woven into all such considerations is the belief that, in the future, society can (or will) move in the direction of wanting simpler goods and services than in the high-consumption economies of the industrialized western world.
There is an additional perspective. Energy developments. have in the past been a dynamic influence in the economic growth and development of industrial economies. Many of the fundamental features of contemporary Western society have had their origins, at least in part, in developments in the field of energy supply technology. One need only think of the emergence of coal in the nineteenth century as a replacement for fuelwood to recognize the significance of this one energy “supply shift for the growth of industrialization in Europe and the United States. It was the transition from wood to coal that made possible the unimpeded growth of the iron and steel industry and the rapid expansion of railway transportation. The subsequent development of electrification in the twentieth century, has, in a similar fashion, been of strategic importance in supporting the growth of productivity, which has led to higher lig standards in the industrialized countries. It has permitted the introduction of new technologies into the home in the form of electric lighting and various electric appliances which have altered the comfort and convenience of living for the mass of the population. The more recent growth of liquid fuels has brought with it the use of automobiles, which altered the patterns of life of people by giving them far greater mobility in all aspect of their lives.
It is not necessary to present a complete catalog of all the basic socio-economic changes that have depended upon, and indeed been produced by, developments in the field of energy technology. The point is that there is a dynamic element that we overlook at our own risk if we try to freeze energy-supply technology by adopting the cry that is increasingly being heard, “this far and no farther.” To be sure, numerous effects which have been produced are negative rather than beneficial in nature. There is air and water pollution, a blighted landscape, and deleterious effects of various kinds which are by-products of energy development. Many of these social costs can be substantially reduced through improved technologies and through institutional and regulatory reforms of various kinds. It is essential that we bend every effort to achieve safe energy technologies, but we should not lose sight of the benefits of improved living standards, decreased drudgery of work and at home greater mobility of all kinds – not just physical but also social which are the result of the thrust which energy technology has – given to economic life,