Economic energy: concepts and applications

Economics of Energy

There are different theories with respect to energy. Mearns argues that people should save energy, because there is a limit to how much proved reserves of hydrocarbons and there may even be limits to how much non-hydrocarbon energy available. It is necessary, therefore, to be highly efficient in our energy use (IanMearns.co.uk, 2014). His views contrast with those of someone like Christof Ruhl, who is the chief economist for BP. Ruhl argues that such efficiency is already occurring, that the West is experiencing lower levels of energy intensity and demand is primarily being driven by the developing world. Changes in the fuel mix are also a factor, he argues, and when developing nations follow the West in lowering their energy intensity, energy demand will start to stabilize (Ruhl, 2014).

The EIA release (2014) supports Ruhl's contention that energy use in the U.S. is starting to stabilize, and that further development of domestic energy reserves is reshaping energy markets.

Their views different in terms of the use of energy, which Ruhl argues is becoming more efficient such that the economic value of energy is improving. Mearns does not seem to agree, and appears to view energy as wasteful. He would like to see more efficient use of energy, but does not appear to agree with Ruhl about whether this is already happening.

There is a definite difference in the underlying philosophy of these two gentlemen. Mearns clearly sees energy as a means to an end, and that end is social, rather than economic. He argues that people should note "have to grow up in a cold home," a social outcome. This comes from his role as an MP; Ruhl works for BP and sees energy as a unit of economic value. Further, the two men differ on where energy development should go. Mearns seeks increased efficiency and the development of non-hydrocarbon sources, while Ruhl is hydrocarbon first but understands that over time there will be a switch to renewable sources.

Part III. Gilding's (no date) opening premise is a little too hyperbolic to be taken seriously. Renewables are not disrupting business models, so on that point he's wrong. Further, it is not renewables that are pushing the fossil fuel industry towards collapse. First, he contradicts himself -- if the collapse is inevitable it cannot be renewables causing it. More than that, it is declining supplies of fossil fuels that will bring about their eventual collapse, and renewables may rise up as substitutes but only when fossil fuels are no longer economically viable.

Another issue to take is his discussion that climate change and the collapse of fossil fuels are related. This is misplaced causation. Climate change is already occurring, and its most dramatic effects will be concurrent with the end of fossil fuel consumption, but are not the cause of it. One could also take issue with his pronouncements about solar. Prices might be coming down -- that's great -- but widespread deployment to this point has relying on market-distorting subsidies (in Germany, for example). The market case for solar that he tries to make is not really a free market case at all.