ENERGY AND FOOD COSTS AND THE STRUCTURE OF THE ECONOMY

Transcription

1 FEBRUARY 27, 2018 ENERGY AND FOOD COSTS AND THE STRUCTURE OF THE ECONOMY London School of Economics CAREY W. KING, PH.D. Research Scientist & Assistant Director, Energy Institute, The University of Texas at Austin

2 Constraints, costs, and the rate of investment in resources (energy & food) have influenced the structure of the economy, thus, with social implications. 2

3 Since the rate of transformation to a low/zero-carbon economy influences energy costs, it is imperative to understand the economic implications. 3

4 Divergent viewpoints exist regarding resource (energy) and economic coupling vs. 4

5 Morris Adelman (1990, Regulation): There is no such thing [as an exhaustible natural resource... a fixed stock such as oil].... The total mineral in the earth is an irrelevant non-binding constraint. Whatever is left in the ground is unknown, probably unknowable, but surely unimportant; a geological fact of no economic interest. 5

6 Morris Adelman (1990, Regulation): There is no such thing [as an exhaustible natural resource... a fixed stock such as oil].... The total mineral in the earth is an irrelevant non-binding constraint. Whatever is left in the ground is unknown, probably unknowable, but surely unimportant; a geological fact of no economic interest. The Bottomless Well (2005): But the issue of exhaustion is resolved. Energy supplies are --- for all practical purposes --- infinite. [p. 181] 6

7 Julian Simon (The Ultimate Resource 2, 1996): So price, together with related measures such as cost of production and share of income, is the appropriate operational test of scarcity at any given moment. What matters to us as consumers is how much we have to pay to obtain goods that give us particular services; from our standpoint, it couldn't matter less how much iron or oil there really is in the natural stockpile. [p. 26] 7

8 Mainstream theories of secular stagnation make almost no mention of energy or resources Yes Demographics Debt (time, money) some Education Wages No (or rarely) Energy & food costs Limits or costs of efficiency to services The Economist, February 20-26,

9 Limits to Growth (2004): global ecological constraints (related to resource use and emissions) would have significant influence on global developments in the twenty-first century. 9

10 Limits to Growth (2004): global ecological constraints (related to resource use and emissions) would have significant influence on global developments in the twenty-first century. humanity might have to divert much capital and manpower to battle these constraints possibly so much that the average quality of life would decline sometime during the twenty-first century. 10

11 The Earth is finite. Does it matter? YES NO The Economist, July 18-24,

12 The Earth is finite. Does it matter? You don t know if: 1) you don t look, or 2) your theory assumes it irrelevant. 12

13 The Earth is finite. Does it matter? You don t know if you don t look. Let take the Julian Simon test: So price, together with related measures such as cost of production and share of income, is the appropriate operational test of scarcity 13

14 TRENDS IN ENERGY AND FOOD COST AS SHARE OF GDP 14

15 Declining energy & costs are the characteristic trend of the industrial era Only after the 1840s was energy cost < 20% of GDP Energy Expenditures: Fouquet, R. (2014) REEP 8(2). Figure: King, C. W. (2015) Energies 15

16 Declining energy & & food costs are the characteristic trend of the industrial era Preindustrial food was major energy supply for mechanical power from humans Energy Expenditures: Fouquet, R. (2014) REEP 8(2). Figure: King, C. W. (2015) Energies 16

17 U.S. Food + Energy costs reached historical low point ~ 2000 Intermediate purchases by Food & Natural Resource Sectors Food + Energy Goods & Services 2002: Lowest natural resource sector spending per GDP BEA Table I-O Benchmark Summary tables. 17

18 World Food + Energy costs reached historical low point ~ 2000 King, C. W. (2015) Energies, Part 2. King, C. W. (2015) American Scientist. BP Stat. Rev. (energy) & FAO (food). 18

19 World Food + Energy costs reached historical low point ~ 2000 Energy: Fizaine, F. and Court, V. (2016) Energy Policy. Food: FAO food production costs. 19

20 What are implications of stagnant or increasing cost share of food + energy? What are the ramifications for Economic growth? Wages and income distribution? Types of technology developed? Low-carbon transition? 20

21 ENERGY AND SOCIETY: CYCLES, STRUCTURE AND COMPLEXITY 21

22 Turchin s Demographic-Structural Theory Secular Trend: Turchin, P. and Nefedov, S. (2009) Secular Cycles [p.20] 22

23 Turchin s Demographic-Structural Theory Secular Trend: Integrative Population low & growing Centralizing Tendency Unified elites Strong state, Stability and Order Turchin, P. and Nefedov, S. (2009) Secular Cycles [p.20] 23

24 Turchin s Demographic-Structural Theory Secular Trend: Integrative Population low & growing Disintegrative Population high & declining Centralizing Tendency Decentralizing Tendency Unified elites Strong state, Stability and Order Divided elites Weak state, Instability and Political Disorder Turchin, P. and Nefedov, S. (2009) Secular Cycles [p.20] 24

25 Population Pressure = Population Pressure Population maximum population that can be fed Energy Expenditures: Fouquet, R. (2014) REEP 8(2). Population Pressure: Turchin and Nefedov (2009) Secular Cycles. Figure: King, C. W. (2015) Energies 25

26 Population Pressure = Population Pressure Population maximum population that can be fed 245 years Energy Expenditures: Fouquet, R. (2014) REEP 8(2). Population Pressure: Turchin and Nefedov (2009) Secular Cycles. Figure: King, C. W. (2015) Energies 26

27 J. Tainter s Energy-Complexity Spiral 27

28 J. Tainter s Energy-Complexity Spiral most of the time complexity increases to solve problems. Tainter and Patzek (2012), Drilling down : The Gulf Oil Debacle and Our Energy Dilemma. 28

29 J. Tainter s Energy-Complexity Spiral most of the time complexity increases to solve problems. Societies subsequently must produce more energy and other resources to pay for the increased complexity. Tainter and Patzek (2012), Drilling down : The Gulf Oil Debacle and Our Energy Dilemma. 29

30 Net energy and societal structure Energy gain [net energy] has implications beyond mere accounting. It fundamentally influences the structure and organization of living systems, including human societies. (Tainter, Allen et al. 2003) 30

31 Net energy and societal structure Net Energy of resources Societal Structure 31

32 What is net power (or energy)? Net power = gross power extraction power invested for extraction & delivery 32

33 What is net power (or energy)? Net power = gross power extraction power invested for extraction & delivery Net (external) power ratio = Net Power Output Power Invested i.e. EROI : energy return on (energy) invested (Charles Hall) 33

34 I use net power concept, with economic data, to interpret economic structure food + energy costs GDP = Net $ Output $ Spending by Food & Energy Sectors Net Power Output Power Invested 34

35 Energy Expenditures: Fouquet, R. (2014) REEP 8(2). Figure: King, C. W. (2015) Energies 35

36 Low Net Power Ratio Low Complexity Energy Expenditures: Fouquet, R. (2014) REEP 8(2). Figure: King, C. W. (2015) Energies 36

37 Low Net Power Ratio Low Complexity High Net Power Ratio High Complexity Energy Expenditures: Fouquet, R. (2014) REEP 8(2). Figure: King, C. W. (2015) Energies 37

38 Food and Energy costs (per GDP): declined with industrialization until ~ 2000 (net power ratio increased until ~ 2000) Tainter: Energy-Complexity Spiral Let s test this idea for the U.S. economy 38

39 Energy and food cost, and structure of the U.S. economy Summary of: King, Carey W. Information Theory to Assess Relations Between Energy and Structure of the U.S. Economy Over Time. Biophysical Economics and Resource Quality, 2016, 1 (2).

40 Net Power Ratio = GDP/(Food + Energy Costs) U.S. Food + Energy costs reached historical low point ~ 2000 Intermediate purchases by Food & Natural Resource Sectors Food + Energy Goods & Services Food + Energy Goods & Services BEA Table

41 Net Power Ratio = GDP/(Food + Energy Costs) U.S. Food + Energy costs reached historical low point ~ 2000 Intermediate purchases by Food & Natural Resource Sectors Food + Energy Goods & Services Food + Energy Goods & Services BEA Table

42 Net Power Ratio = GDP/(Food + Energy Costs) U.S. Food + Energy costs reached historical low point ~ 2000 Food + Energy Sector Spending Intermediate purchases by Food & Natural Resource Sectors Food + Energy Goods & Services / GDP Food + Energy Goods & Services BEA Table

43 Net Power Ratio = GDP/(Food + Energy Costs) U.S. Food + Energy costs reached historical low point ~ 2000 GDP / Intermediate purchases by Food & Natural Resource Sectors Food + Energy Goods & Services Food + Energy Sector Spending Food + Energy Goods & Services BEA Table

44 Net Power Ratio U.S. Food + Energy costs reached historical low point ~ GDP / Food + Energy Sector Spending

45 I use information theory. What is it? Information content Predicated on the probability of an event Less probable event More Information 45

46 I use information theory. What is it? Information content Predicated on the probability of an event Less probable event More Information Information entropy Describes average information content of the entire set of possible events 46

47 I use information entropy to describe the U.S. economy as a system The events are the transactions of one sector from another Data are economic Input-Output tables from U.S. BEA ( ) The probabilities are sectoral transaction as a fraction of all intermediate transactions 47

48 I use information entropy to describe the U.S. economy as a system The events are the transactions of one sector from another Data are economic Input-Output (Use) tables from BEA ( ) The probabilities are sectoral transaction as a fraction of all intermediate transactions 48

49 Three information theory metrics describe structure of I-O tables 1) Information Entropy The larger it is the more complex is the economy the more equally informative is each transaction 49

50 Three information theory metrics describe structure of I-O tables 2) Redundancy Describes transactions 100% Redundancy 0% Redundancy 1/16 1/16 1/16 1/16 1 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 50

51 Three information theory metrics describe structure of I-O tables 2) Redundancy Describes transactions 100% redundancy when each transaction is the same Also maximum information entropy 100% Redundancy 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 0% Redundancy 1 51

52 Three information theory metrics describe structure of I-O tables 2) Redundancy Describes transactions 100% redundancy when each transaction is the same Also maximum information entropy 100% Redundancy 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 1/16 0% Redundancy 1 52

53 Three information theory metrics describe structure of I-O tables 3) Equality Describes sectors 100% Equality 0% Equality 1 53

54 Three information theory metrics describe structure of I-O tables 3) Equality Describes sectors 100% Equality 0% Equality 100% equality when all sectors have equal total transactions =Σ =Σ =Σ =Σ 1 Σ=Σ=Σ=Σ 54

55 U.S. economy had 3 Phases of structural change from 1947 to 2012 King, Carey W. Biophysical Economics and Resource Quality,

56 Phase 1 ( ): Increasing Complexity on all metrics Metric Change (%/yr) Gross Power +4.1 Net Power Ratio +2.8 H (infor. Entropy) +0.4 Equality +0.3 King, Carey W. Biophysical Economics and Resource Quality, Redundancy

57 Phase 2 ( ): Mixed Complexity indicators King, Carey W. Biophysical Economics and Resource Quality, Metric Change (%/yr) Gross Power +1.9 Net Power Ratio +3.4 H (infor. Entropy) -0.1 Equality -0.2 Redundancy

58 Phase 3 ( ): Decreasing Complexity on all metrics Metric Change (%/yr) Gross Power -0.3 Net Power Ratio -1.8 H (infor. Entropy) -0.4 Equality -0.2 King, Carey W. Biophysical Economics and Resource Quality, Redundancy

59 World I-O Database shows a similar trends as the U.S. from 1995 to 2011 (each country weighted by GDP) WIOD (Redundancy) WIOD (Equality) King, Carey W. Biophysical Economics and Resource Quality,

60 U.S. Employee Compensation (% of GNI) U.S. Energy Consumption (MMBtu/yr/person) Employee compensation as another structural metric changing from Phase 1 to 2 Responses to oil constraints were not neutral: labor vs. capital Efficiency New energy technology development Starting in early 1970s Stagnant compensation share & primary energy/person 68% % % % % % % % BEA: Table National Income by Type of Income 19

61 Takeaways Energy and food have stopped getting cheaper since ~2000 A major discontinuity in the fossil/industrial era ~ 10 yrs before record high debt and near-zero interest rates The distribution of the flow money within the U.S. economy is connected to Power consumption Natural resource costs 61

62 Takeaways Reponses to the geological fact of finite resources have not been of no economic interest. (as implied by Morris Adelman) Particularly if you perform labor for a living in OECD countries! 62

63 The energy-economy structural link has implication for low-carbon transition The faster a low-carbon transition The more resources, skilled & unskilled labor, etc. are allocated to the task The higher we should expect energy costs during the transition We might expect a simplification of society/economy Continued wage disparity w/o separate adjustments (e.g., in infrastructure ownership) 63

64 Carey W. King, Ph.D. Research Scientist & Assistant Director, Energy Institute Jackson School of Geosciences Lecturer, McCombs School of Business & LBJ School of Public Affairs energy.utexas.edu