insead alumni energy network 22nd october 2011 by benjamin warr
DESCRIPTION
What role does energy, and specifically oil play in the economy? What impact on growth can we expect a decline in oil production to have? When is the decline in production likely to happen? What can we do to mitigate the worst impacts?TRANSCRIPT
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Energy and Wealth Creation
[email protected]://sites.google.com/site/rexsgate/
Dr Benjamin Warr, Senior Research Fellow
INSEAD Social Innovation Centre Sustainability Group
Alumni Reunion Energy Network Presentation
22ndOctober 2011
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Topic and Objectives
• Reconsider some assumptions of the role of energy
• Provide alternative assumptions: energy as a driver of growth
• Supply and efficiency are critical for growth
• Supply challenges lay ahead
• Efficiency promises are blocked, ignored and unfulfilled
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Standard Paradigm
• Closed system in equilibrium with no wastes
• Growth occurs through accumulations of capital and labour
• Both increase in productivity at an exogenous rate (TFP)
Production of Goods and Services
Consumption of Goods and Services
Purchases
Wages, Rents
Invested(Energy Generating)
Capital
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GDP Index (1900=1)
1900 1920 1940 1960 1980 2000year
5
10
15
20
25
US GDP
Cobb-Douglas
SOLOW RESIDUAL(TFP)
US GDP actual vs. modeled using a 3-factor Cobb-Douglas
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Unexplained Solow residual
TFP (~1.6% per annum)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
year
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
Index (1900=1)
The Solow residual, US 1900-2010
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Something is missing ?
• Unable to explain historic growth rates.
• Exogenous unexplained technological progress is assumed, hence growth is assumed to continue.
• No link to the physical economy, only capital and labour are productive.
• Energy, materials and wastes are ignored.
• Energy availability is overcome by investments in capital.
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Capital and useful work substitute for labour: the rise of the energy slaves
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Our approach
0%
10%
20%
30%
40%
50%
60%
1900 1925 1950 1975 2000
Heat (Hight Temperature)Heat (Low Temperature)Mechanical DriveElectricityLightMuscle Work
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
1900 1925 1950 1975 2000
Coal
Crude Oil and PetroleumProductsNatural Gas
Non-conventional
Biomass (Food and Feed)
0%
5%
10%
15%
20%
25%
30%
35%
40%
2000199019801970196019501940193019201910year
effic
ienc
y
Low Temperature Space Heating
Mechanical Work
Medium Temperature Industrial Heat
High Temperature Industrial Heat
Electric Power Generation &Distribution
SUPPLY USES EFFICIENCY
USEFUL
WORK
0
5000000
10000000
15000000
20000000
25000000
30000000
35000000
40000000
45000000
1900 1925 1950 1975 2000
Heat (Hight Temperature)Heat (Mid Temperature)Heat (Low Temperature)Mechanical Drive
ElectricityLightMuscle Work
Wastes
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Exergy (or maximum available work)
The exergy flow from the sun, and the exergy stocks on earth create the resource base for human societies on earth.
Exergy Quality Index
0
10
20
30
40
50
60
70
80
90
100
Poten
tial
Kineti
c Elec
trica
lChe
mical
Nucle
arSun
light
Hot Ste
amDist
rict H
eatin
gW
aste
Hea
tAm
bient
Hea
t
Exergy reflects energy quality in terms of distinguishability and availability
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Efficiency
Each transformation involves a loss of available energy (exergy)
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Exergy is consumed to provide energy services
A system expressed in energy units looks as though
the room for efficiency improvements is small.
Accounted for in exergy units reveals the loss of available work due to inefficiencies.
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Exergy input share by source (US 1900-2000)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1900 1925 1950 1975 2000
Year
Biomass (Food andFeed)
Non-conventional
Natural Gas
Crude Oil andPetroleum Products
Coal
Source: Ayres & Warr, 2009
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Useful work by type(US 1900-2000)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1900 1925 1950 1975 2000
Year
Muscle Work
Non-Fuel
Light
Electricity
Mechanical Drive
Heat (LowTemperature)
Heat (HightTemperature)
Source: Ayres & Warr, 2009
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0%
5%
10%
15%
20%
25%
200519851965194519251905
year
effic
ienc
y (%
)
US
Japan
UK
High Population Density Industrialised Socio-ecological Regimes
Resource limited
Low Population Density Industrialised New World Socio-ecological Regime
Resource abundant
Evidence of stagnation•Pollution controls •Technological barriers•Ageing capital stock•Wealth effects
Efficiency
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Empirical and Estimated GDP US 1900-2000
0
5
10
15
20
25
30
1900 1925 1950 1975 2000
Empirical GDP
Estimated GDP
Source: Ayres and Warr, 2009
Using a LINEX production function with useful work (exergy*efficiency) as a factor
of production.
Corresponds to Cobb-Douglas with Capital share 0.57, Labour share 0.01and Useful
Work share 0.41.
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Our growth dynamic
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Concerns
• Availability and supply of energy (and specifically oil)• low price elasticity – people need it• increasing costs of production – harder to find and obtain• weak substitutability – alternatives unavailable for various reasons• increasing demand growth rate, global energy equity and poverty
alleviation
• The rate of efficiency improvements• imperfect markets (externalities, subsidies)• wealth effects, the energy-poverty nexus imperative• lock-in and current technology asymptotes• climate, health & safety (real and unreal concerns)• (lack of access to finance)
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Oil Supply
0
20
40
60
80
100
-4 -1 2 5 8 11 14 17 20 23 26 29 32 35 38 41Years
Ann
ual D
isco
very
& P
rodu
ctio
n(a
rbitr
ary
units
)
Conv. oil peak is counter-intuitive. It occurs when production is rising, reserves are large, new fields are being discovered, & technology is increasing recovery factors.
From discovery to production takes~ 5 years, starting with the big and easy fields.
0
10
20
30
40
50
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41
Years
Ann
ual P
rodu
ctio
n(a
rbitr
ary
units
)
Produced Reserves
Yet-to-Find
Discovery
Production
Source: Roger Bentley, University of Reading
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Peak oil - fluctuating plateau - declineconsumption exceeds discoveries since circa. 1980
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Net Energy and EROEI
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Impacts on oil price
Long-run costs increasing due to low elasticity of substitution and price
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0
20
40
60
80
100
120
1950 1975 2000 2025 2050
year
GD
P (
1900
=1)
1.2% per annum1.3% per annum1.4% per annum1.5% per annumempirical
What effects efforts to increase energy productivity?
0
5
10
15
20
25
30
2000199019801970196019501940193019201910
year
inde
x
r/gdp
e/gdp
Historical rate of decline in exergy intensity of GDP is 1.2% per annum
For Business-as-Usual, (1.2% decay rate) – by 2025 GDP doubles and exergy inputs increase by half.
With a 1.4% decay rate output doubles ~10 years later, but requires ~50EJ less than 2010 levels
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Possible trajectories for efficiency improvements
For efficiency growth smaller than 1% p.a. we obser ve a future decline in GDP. The historical rate of improvement is 1.1% per annum.
0
10
20
30
40
50
60
70
1950 1975 2000 2025 2050
year
GD
P (
1900
=1)
lowmidhighempirical
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
1950 1975 2000 2025 2050
year
tech
nica
l effi
cien
cy (
f)
lowmidhighempirical
Efficiency ScenariosLow 0.4% yr -1
Mid 0.72% yr -1.High 1.2% yr -1
Scenario GDP growth (2030)Low 0.4% yr -1 -2.0%High 1.2% yr -1 2.2%
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Oil scarcity, growth, global imbalancesIMF , World Economic Outlook April 2011
2000 05 10 15 20-5
-4
-3
-2
-1
0
1
2000 05 10 15 20-4
-3
-2
-1
0
1
2000 05 10 15 20-4
-3
-2
-1
0
1
2000 05 10 15 20-4
-3
-2
-1
0
1
2000 05 10 15 20-8
-6
-4
-2
0
2
Real GDP (percent difference)
World
Figure 3.10. Alternative Scenario 1: Greater Subst itution away from Oil
Oil Exporter United States Emerging Asia
2000
Euro Area
Benchmark scenario Upside scenario
Real GDP(percent difference)
This scenario considers a higher value for the price elasticity of demand (0.29, compared with 0.08 in the baseline scenario), consistent with greater substitution away from oil.
This scenario considers a higher value for the pric e elasticity of demand (0.29, compared with 0.08 in the baseline). This is consistent with greater s ubstitution away from oil.
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2000 05 10 15 20-15
-10
-5
0
5
2000 05 10 15 20-15
-10
-5
0
5
2000 05 10 15 20-15
-10
-5
0
5
2000 05 10 15 20-15
-10
-5
0
5
2000 05 10 15 20-20
-15
-10
-5
0
5
Real GDP (percent difference)
World
Figure 3.11. Alternative Scenario 2: Greater Decli ne in Oil Production
Oil Exporter United States Emerging Asia
2000
Euro Area
Benchmark scenario Downside scenario
Real GDP(percent difference)
This scenario considers the implications of a more pessimistic assumption for the decline rate of oil production (3.8 percentage points annually, compared with 1 percentage point in the baseline scenario).
Oil scarcity, growth, global imbalancesIMF , World Economic Outlook April 2011
This scenario considers a more pessimistic assumpti on for the decline rate of oil production
3.8 percentage points annually compared with 1 p.p. in the baseline.
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2000 05 10 15 20-8
-6
-4
-2
0
2
2000 05 10 15 20-5
-4
-3
-2
-1
0
1
2000 05 10 15 20-8
-6
-4
-2
0
2
2000 05 10 15 20-8
-6
-4
-2
0
2
2000 05 10 15 20-10
-8
-6
-4
-2
0
2Real GDP (percent difference)
World
Figure 3.12. Alternative Scenario 3: A Greater Eco nomic Role for Oil
Oil Exporter United States Emerging Asia
2000
Euro Area
Benchmark scenario Downside scenario
Real GDP(percent difference)
This scenario considers a higher contribution of oil to output: 25 percent for the tradables sector (compared with 5 percent in the baseline scenario) and 20 percent in the nontradables sector (compared with 2 percent in the baseline scenario).
Oil scarcity, growth, global imbalancesIMF , World Economic Outlook April 2011
This scenario considers a higher contribution of oi l to output growth.
25% compared to 5% in baseline scenario – consistent with Ayres-Warr model.
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Summary
• Neoclassical growth theory does not describe the natural resource dependency of growth.
• We model economic growth with useful work as a factor of production. This explains past growth well.
• Economic growth need not be a constant percentage of GDP. It can be negative.
• Future sustainable growth in the face of peak oil depends on accelerating energy (exergy) efficiency gains and alternative supplies.
• Future efficiency gains may be inexpensive if existing double dividend possibilities are exploited.
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A path forward – a neo-liberal solution
• These results provide the evidence to justify macro-economic (risk-management) policies:
• energy security through appropriate long-run renewable energy policy
• energy productivity through short-term energy efficiency drive• economic stimulus through ‘green’ jobs creation
• Large but avoidable inefficiencies exist corresponding to significant departures from the optimal equilibrium growth path that is commonly assumed.
• Eliminating inefficiencies can create “double divid ends”
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Sources
Ayres, R.A. and Benjamin S. Warr, 2010. The Economic Growth Engine: How energy and work drive material prosperity, Edward Elgar.
Smil, V. 2007. Light behind the fall: Japan’s electricity consumption, the environment, and economic growth. Japan Focus, April 2.
Cleveland, C. J. 1991. Natural resource scarcity and economic growth revisited: Economic and biophysical perspectives. In Ecological Economics: The Science and Management of Sustainability. Edited by R. Costanza. New York: Columbia University Press.
Hall C.A.S. and John W. Day, 2009. Revisiting the Limits to Growth After Peak Oil. American Scientist, Volume 97, Number 3, Page: 230.
IMF, 2011. Oil Scarcity, Growth and Global Imbalances. World Economic Outlook 2011.