Energy and GNP

It is frightening how little people have understood the implications of the energy crisis. Most people think it will simply mean that we will have to save fuel, use smaller cars, heat our houses more sparingly, etc. They fail to realise that unless we go on increasing energy consumption every year, economic growth cannot be maintained, and if it isn’t then our economy will collapse, and since our society is organised around its industrial activities, then this will collapse too.

The key correlation which our economists and politicians should be examining today is that between increased energy consumption and the growth of GNP. Indeed, if industrial society is to be kept going, the greatest priority today should be discovering how to bring about the maximum increase in the latter with the minimum increase in the former.

One of the people who appears to have looked at this most carefully is Joel Darmstadter, Senior Research Associate with Resources for the Future and principal author of Energy in the World Economy (1971).

In a recent article he shows how this relationship has changed in the US in the last century and emphasises its key significance. “Whether a 4 per cent rate of growth in GNP means a 3.5 or 4.5 per cent growth in energy consumption,” he writes, “could spell the difference in US energy growth, in the year 2000, equal to this country’s total annual level of consumption within the past few years.”

Between 1880 and 1920 in the US, energy consumption increased by an average of 5.6 per cent while GNP increased by no more than 3.4 per cent. In the succeeding 40 years, between 1920 and 1960, energy consumption grew by no more than 2.1 per cent, while GNP increased at a rate of 3.2 per cent. What accounts for this change? To begin with, according to Darmstadter, the first period was characterised by a rapid growth of the manufacturing industry, which requires a very high energy input per unit of activity. The developing countries are passing through this stage at the moment.

The reduction in the rate of increase of energy input to that of economic growth, Darmstadter attributes, among other things, to the rapid rise of electrification, which greatly increased the efficiency of factory operations. This occurred in spite of the low efficiency of electricity generation, which however has since been substantially improved. Thus, in 1925 it took over 2 lbs of coal to produce 1 kWh while in 1960 it took less than 1 lb. Also, during this period steam locomotives were replaced by more efficient diesel engines.

Between 1960-65, US energy consumption increased at the average annual rate of 3.6 per cent, while GNP increased by 4.8 per cent. Since then, there has been a sharp reversal. Between 1965-70 energy consumption rose by 5 per cent, per annum, while GNP only rose by 3.2 per cent. In 1970 energy consumption rose by over 4.5 per cent, while GNP actually declined. The trend, therefore, is now towards a less efficient use of energy for the purpose of generating GNP. Why has this occurred?

One reason appears to be that progress in increasing the efficiency of electricity generation has ceased. Indeed, it has declined from 32.5 per cent in 1965 to 30 per cent in 1970. It doesn’t appear that electric power use by household/commercial and industrial sectors can be incriminated. On the other hand, the energy used for transport purposes increased substantially from 3.3 per cent per annum to 5.3 per cent. In addition, there is a tendency for basic energy resources to be consumed for uses other than the generation of power, in the petrochemical industries for instance. Usage for this purpose increased at a rate of 3.3 per cent during 1960-65 and rose to 8.1 per cent during 1965-70.

According to current projections made by the Bureau of Mines and the Federal Power Commission (FPC), energy consumption in the US during the period 1969-2000 is expected to increase by 3.5 per cent per annum—slightly above its long term historic rate of 3.2 per cent since 1900, though below the average figure of 4.3 per cent recorded during the 1960s. Electricity consumption is expected to increase by 6.7 per cent during this period, which is somewhat below its rate of increase during recent years. This means that that part of energy consumption going into electric power generation will increase from 25 per cent in 1969 to about 50 per cent by the year 2000. At the same time, it is expected that GNP will increase by 4 per cent per annum.

There is still considerable doubt as to what will happen to our key correlation (energy consumption and GNP), in the opinion of Darmstadter. The recent unfavourable trends, he considers, may have been related to such things as the Vietnam War and the disproportionately rapid growth of high powered cars, also to the growing use of electric heaters and air conditioning devices, which consume a very considerable amount of energy. A lot of questions remain to be answered. For instance, are there likely to be further improvements in electricity generation efficiency? Will the shift towards services and leisure industries reduce energy consumption? In the meantime, Darmstadter regards the Bureau of Mines and FPC projections as slightly optimistic. If anything, energy consumption levels are likely to be higher than expected.

Needless to say, Darmstadter is talking about the fuel requirements to keep the American economy functioning at the rate which appears to be necessary to keep everybody happy. He does not take into account the inevitable increases in the price of basic fuels, and the actual shortages which are already beginning to occur, and which can only become more serious.

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