The Energy Limit Model

The energy limit model to economic growth is working beautifully, having come into play prior to the 2008 crisis and now once again forcing another global slowdown. Above is the most recently updated chart showing energy expenditures as a percentage of US GDP. As usual, I have not merely taken EIA.Gov’s calculations here, but cross checked various data from EIA.gov on total energy spending with BEA.gov data on historical GDP. In addition, I am working on a chained (real) dollar version of the above chart but here I have presented the nominal version of both expenditure and GDP. | see: US Energy Expenditure as a Percentage of GDP  1999-2010 (All Nominal Dollars).

As we can see, the relief from the 2007-2008 energy spike was short-lived. Whatever economic “recovery” the US was able to cobble together was built on the base of lower energy price levels in 2009. But by 2010, the energy expenditure percentage was right back up above 8.00%. More urgently, preliminary data shows that 2011′s level is back above 9.00%. Given the recovery in coal and oil prices, that’s no surprise. This Spring’s run of terrible economic data, showing the US economy turning back down again, now has an obvious cause.

But it’s not like Americans haven’t tried to reduce their use of the primary energy source–oil. In the chart below, we can see that US consumption of oil, expressed in BTU, has fallen dramatically from the highs of mid-decade. While the US consumption of coal and natural gas—and also wind and solar power—has rebounded more strongly since the 2009 lows, US consumption of oil is still down nearly 11.00% from peak. This aspect of the story contains both good news and bad news, which I will explain below. | see: US Annual Petroleum Consumption in Quadrillion BTU 1995-2010.

While it’s a positive that the US is reducing its demand for oil, it doesn’t necessarily mean we are becoming more efficient. More to the point, the US is no longer able to reduce its overall energy expenditures as an input to its GDP. Post 2008, some of the “gains” enjoyed by lower energy expenditures were simply made possible by a lower GDP. When the US reduces its use of oil, and switches over more to coal and natural gas, its GDP tends to fall. For an economy that structured itself towards oil-dependency the past 70 years, that should be expected. The US therefore can have a higher GDP or a lower GDP, but the Energy Limit model reveals that energy costs are becoming more stubborn on the upside. This is a structural change, that will not revert.

Industrialism in the US, and elsewhere in the OECD, is therefore no longer able to outrun energy costs. This means that in order to maintain production, prices for assets like housing, and input costs such as wages, are now under secular downward pressure. Alternately, we can produce less or measure “production” in non-industrial terms. Either way, this megatrend is simply the reverse of the dynamic which began 250 years ago when humanity moved from wood to coal, and the impact on wages and asset prices was revolutionary. The same model which explains that ascent, now explains our descent.

–Gregor

  • http://www.regional-communities.com Tom Christoffel

    The U.S. has structural obstacles to becoming more efficient in transportation. It is called sprawl. It wasn’t an accident, but once in place, the speculative real estate market fueled. Land appreciation is the quickest way to unearned wealth.

    To understand what idea drained American cities of population, one should read: ”The Reduction of Urban Vulnerability: Revisiting 1950s American Suburbanization as Civil Defence” by Kathleen A Tobin, Purdue University, Cold War History, Vol.2, No.2, January, 2002.

    This is an unrecognized if not suppressed history of the roots of sprawl in the U.S. as a defensive measure. Surviving a feared nuclear Pearl Harbor was the goal. Dispersion was the strategy. 

    Look for it on-line. If you can’t find it, send me an email and I can send a PDF. The suburbanization pattern has led to extreme commuting - 50 miles plus one way – in many regions. It also contributed to the housing cost run-up. Suburban communities, in order to balance the cost of services from residential units, raised requirements so that every new home would pay the cost of any new children that might appear in the school system.

    Low density increases the number and distance of trips. Nothing is walkable, as was the case in all cities and towns up through the 1950′s. Technology can use communication to substitute for some trips, but it can’t get milk and bread.

    Industry should have moved to the suburbs, with the cities retained for housing and services. Transit lines could have been supported from population clusters to industry clusters. 

    Everything is so dispersed that huge park and ride lots are needed to collect a few people for a vanpool.

    In the 1970′s, transportation was the 15th criterion used by home buyers in selecting a location. They had a car and could get anywhere in a reasonable time. The newly built Interstates had excess capacity to take commuters into the cities. That didn’t last.

    Dense markets have lots of opportunities and are efficient due to proximity. It can also be a target. Therefore communities develop security and manners so as to benefit.

    The clock can’t be turned back, but going forward it is useful to understand how we ended up with this beautiful, inefficient and indebted America.    

  • curlyhoward1

    Interesting theory, as is the collusion between car makers and big oil to annihilate public transportation.
    There’s still incredible animosity towards any sort of transit authority, as well as mandated fuel efficiency in the US. Florida governor Rick Scott recently turned down a Federal grant for high speed rail citing unknown costs for the taxpayers of Florida as well as the fact that Floridians prefer to drive  themselves everywhere. I would have preferred a grant to Amtrak to rehabilitate existing infrastructure they share with CSX, but it was a step in the right direction and may have been more palatable to the Jetsons generation.

    It’s probably futile to engage in hand wringing over the impending crisis, large segments of the population will always doubt peak oil as well as climate change. Those of us who are aware should be thankful to blogs such as this to keep us informed as to recent trends. Thanks.

  • Anonymous

    Also add that the National Grid people may impose limits on the construction & use of alternative energy – no segregation of power & interest there? (caugh) The utilities benefit greatly by their chokehold – us consumers zero

  • http://www.facebook.com/people/String-Larson/568119729 String Larson

    There’s a nice Elliot Wave pattern playing out in that top chart. 

  • Doug Dillon

    You are brilliant. Any way I can follow the applications of your work more closely on a subscription basis or something? d o u g d i l l o n AT g m a i l DOT c o m

  • http://twitter.com/econundertow steve from virginia

    I’m glad you are doing this, Gregor. It’s hard for people to make the price/output connection. They believe that prices can go up while everything else will simply carry on as per usual (but with pesky higher costs).

    Also sobering is the energy consumption in China relative to GDP. If China’s output was to rise to the US level — all else being equal — her energy consumption would be double the US’s! Of course, that isn’t going to happen: China’s output is strangling on fuel (coal) shortages right now.

    The upshot is that US energy consumption and cost should be higher than your graph indicates b/c the US has exported its manufacturing- sector fuel consumption to China. It has also exported manufacturing jobs and the consumer- level consumption that would attend those jobs.

    What appears to be American ‘efficiency’ is really creative accounting.

  • gregor.us

    Thanks Doug. As we have discussed, I am going non-commercial this year at Gregor.us but when a new subscription or data project gets underway, I will make an announcement. Cheers, Gregor

  • gregor.us

    Yes, you are quite correct. However, it is also true that portions of the US have comparable densities to many parts of Europe–which of course are covered in a greater distribution of rail. I wish I could pull out or link one of the recent studies I’ve seen on this, but there is good work in this area. In short, many metro regions in the US have extensive commuter rail or light rail buildout plans. All of these could have been greenlighted by a government that actually understand the problem. Our government, by contrast, continues to invest roughly 95 out of 100 dollars devoted to transport spending to Autos and Highways.

    I’ve done alot of work showing that the system originally built out on 14 dollar oil doesn’t work at 100 dollar oil. But, both from DC and in States, we continue to invest in it. No doubt you’ve heard of the Sunk Cost effect. Well, we suffer from a very bad case.

    G