Energy And GDP: You Have To Consume To Grow

By Investor Empires On Sep 26, 2023

This piece continues from A Most Ridiculous World: The Politicization of Energy from yesterday.

Feeding the Grown and the Growing

Stern, Burke and Bruns (2016)7 concluded in their analysis that access to electricity is not sufficient for economic growth but that electricity use and GDP have a positive relationship. Simply providing the availability of a resource does not dictate advancement, it is the use that results in advancement. Common sense.

“As a result, energy is an essential factor of production and continuous supplies of energy are needed to maintain existing levels of economic activity as well as to grow and develop the economy (Stern, 1997). There may also be macroeconomic limits to substitution of other inputs for energy. The construction, operation, and maintenance of tools, machines, and factories require a flow of materials and energy. Similarly, the humans that direct manufactured capital consume energy and materials. Thus, producing more of the substitutes for energy requires more of the thing that it is supposed to substitute for. This again limits potential substitutability (Cleveland et al., 1984).”

– The Impact of Electricity on Economic Development: A Macroeconomic Perspective (2017)

The problem is this witch’s brew of ESG over exuberance, demonization of oil & gas, and climate catastrophization has caused a bubbling-up of energy moralization discussion and social pressures to focus specifically on emissions of energy generation. While ignoring discussions of reliability of electricity provision and the capacity of supporting infrastructure. And yet, also ignoring the real substitutability of oil & gas (rather the lack of substitutability), from our current state. All of this is under the intent of establishing limitations on the consumption of energy and power. A strictly anti-growth mission. As we have stated, being anti-growth for an ecosystem is patently pro-catastrophe.

Focusing solely on emissions without also considering the need to maintain availability, reliability, capacity, and cheap costs, only results in a cannibalization of already established infrastructure – weakening provisions for developing and supplying innovative new methods to continue improving efficiencies (including reducing generation of waste and pollution). These growing inefficiencies would then also lead to inviting inefficiencies in energy generation and electricity provision, leading to increases in costs of production and living. Snowballing to a reduction of living standards across the board, and furthering the inefficiency problem(s).

This gets us back to the ridiculousness of over tribalization and politicization of our energy generating projects and infrastructure. The combined smear campaigns of hydrocarbons (oil & gas) and nuclear, and the pedestalization of renewables (wind & solar), with the complete exclusion of hydropower from these discussions, invites significant fragility to already developed economies.

“While solar energy is abundant and inexhaustible, it is diffuse compared to fossil fuels, and plants only capture about 1% of the energy in sunlight. Therefore, the maximum energy supply in a biomass-dependent economy is low, as is the ‘energy return on investment’ for the human-directed energy expended to extract energy. This is why the shift to fossil fuels in the Industrial Revolution was so important in releasing constraints on energy supply and, therefore, on production and economic growth (Wrigley 2010).

In spite of this, core mainstream economic growth models disregard energy or otherresources (Aghion and Howitt, 2009), and energy does not feature strongly in research on economic development (Toman and Jemelkova, 2003).”

– The Impact of Electricity on Economic Development: A Macroeconomic Perspective (2017)

Ultimately suggesting that to try and “phase-out” already entrenched energy resources and sources of power by force (such as through legislation), rather than through free market dynamics, is a fool’s errand and a further waste of time and resources. Making the legislators like those in the clip provided at the very beginning of this essay involving Jamie Dimon explicitly comical. Not only because these approaches would almost certainly break the system itself if they were to succeed, but such activity would be met with such aggressive resistance due to increasing costs of power that the more than likely lashback may result in a successful defense of the system itself anyway. Ultimately leading to only failure, regardless of which of these outcomes occurs.

In general, a well functioning society continues to utilize entrenched energy sources while using the most efficient and reliable energies in greater percentages to further improve efficiencies of these methods, while also working to develop continually more innovative and rewarding sources of energy. Improving the economics and return on investment in energy generation itself, which ultimately uplifts the standards of living. A positive feedback loop.

Figure 2. Source: Our World In Data

Let’s take a look at the investment relationship with regards to energy generation, capacity, and infrastructure itself.

Energy and Return On Investment

Stern and Kander (2012) concluded that increasing population without also increasing energy supply results in a degradation of output8 – shocker. Stern and Kander produced their own version of the Solow Model to include a low substitutability energy source (such as oil and gas) as well as labor into economic projections, as they believed that current economic models do not adequately incorporate the economic importance of energy to the health of an economy, particularly when looking at developed nations with higher access to reliable power and energy. Doing this brought them to an additional conclusion that increasing supply of energy, alongside population, and utilizing technological advancements that augment energy generation, improve output. Again, shocker. But more importantly, this would suggest that energy generation augmentation, while increasing access to energy (as well as supply), improves utilization and output, thereby boosting GDP, even for already developed nations.

The Solow Model and the Steady State

For those that do not know what the Solow Model is (and did not watch the educational YouTube video that I so graciously provided above to assist your understanding), let’s take a brief detour.

The Solow Model

The Law of Diminishing Returns, when plotted against depreciation (which is a constant), and incorporating investment and rate of return on those investments, results in a trajectory that approaches break-even over time. Later resulting in negative returns on investment on a long enough timescale. This dynamic is particularly real in the energy infrastructure and output discussion with regards to civil development and the health of an economy. What this shows is that countries that are under developed and incorporating modern technologies in energy generation and distribution receive greater returns in the early stages with diminishing returns as energy availability and use across their country becomes ubiquitous. Leading countries that have saturated access to reliable power (like the US & Europe) to see slower return on investment than do the underdeveloped countries that are playing catch-up by deploying modern strategies. Makes sense.

What this also suggests is that failing to successfully deploy continually improving methodologies and technologies for producing, capturing, distributing, storing, and utilizing energy results in costs of mere maintenance that will begin to eat at investment. Meaning you’re wasting more and more time, effort, and resources to simply tread water while only managing to slow your own degradation, and gain zero ground. Requiring a constant search for improving our capabilities in everything related to energy; we cannot afford to stop. To stop looking for greater sources, methods of capture, distribution, utilization, and consumption strategies would quite literally lead to expiration.

The Solow Model & Energy

What Stern and Kander elucidate is that when advancements in technological augmentation of energy generation are incorporated into a growing population base, alongside improving utilization of energy, economies can extend the life of the Solow model to avoid crossing the break-even junction. Effectively allowing for consistent GDP expansion, much like the US has experienced over the past two centuries.

Figure 4. Source: The Solow Model and the Steady State, Marginal Revolution University

Through innovating energy generation with augmentative technologies and methodologies, increasing the access and capacity of energy, and increasing the population base, we get prices of effective energy that continue to trend towards 0. In layman’s terms; we are getting greater and greater returns for the amount of energy that is being consumed by getting more work done. Even though we continue to consume more energy than we ever have.