The myth of affordable energy

Ed Dolan, a well known economist, gave an interview to Oilprice.com, in which he spoke about various energy and economic issues. Mr. Dolan shared his thoughts on why the US oil and gas boom is hurting Russia's global influence, why Obama's desire to cut oil industry tax breaks could be a great idea, why the EU was flawed from the start and many other things

Q: Access to cheap energy is vital to economic growth. What do you see happening with the economy over the coming years as the time of cheap oil comes to an end?

A: In my view it is a myth that cheap energy - "affordable energy" as many people like to say is vital to growth. The idea that there is a lockstep relationship between growth of GDP and use of energy is widespread, but the data simply does not bear it out. Instead, what they show is that the world's best-performing economies have become dramatically more energy efficient over time.

The World Bank uses constant-dollar GDP per kg of oil equivalent as an energy efficiency metric. From 1980 to 2010, the high-income countries in the OECD have increased their average energy efficiency by 55 percent. The United States has done a little better than that, increasing its energy efficiency by 81 percent over that period. That's pretty remarkable, considering that we haven't really had a policy environment that is supportive of efficiency.

Think what we could do if we did.

Even after the efficiency gains in efficiency we have made, we still have a long way to go. The US economy is still 15 percent less energy efficient than the average for high-income OECD countries, giving it plenty of room to improve. Switzerland is almost twice as energy-efficient as the US, and the UK is 68 percent more efficient.

Some people say that the only reason the United States has been able to grow while using less energy is the deindustrialization of its economy, outsourcing heavy industry to China. However, compare the US with Germany. Germany is an export powerhouse and Europe's best-performing economy, yet its energy efficiency has increased at almost the same rate over the last 30 years as the United States, an 80 percent gain in efficiency compared to 81 percent.

Furthermore, despite being proportionately more industrialized than the US and a major exporter, Germany squeezes out 41 percent more GDP from each kg of oil equivalent.

In short, we don't have to hypothesize about the possibility of someday breaking the lockstep relationship of growth and energy use-we and most of the rest of the advanced world are already doing it.

Q: What effect can you see America's Oil & Gas boom having on foreign policy?

A: On the whole, I see it as beneficial. Energy dependence has led us to buy a lot of oil from countries that are unstable and/or unfriendly to us. Anything we can do to reduce that dependence gives our foreign policy more room to maneuver. The beneficial effects reach beyond our actual imports and exports. The US gas revolution is having repercussions all the way to Russia, where Gazprom is seeing its market power undermined, and Russia, as a result, is losing some of the geopolitical leverage its pipeline network has given it.

Q: From Siberia and Poland to China and Qatar - the shale revolution has politicians salivating at the thought of a cheap and abundant source of energy. But can the results seen in the U.S. be easily replicated in other parts of the world?

A: I think you're going to have to ask someone with more engineering background for the technical details, but from what I read, the answer is that it won't always be easy. It is my understanding that some countries where shale seemed just recently to have great promise have already encountered disappointments in practical exploratory work. Poland I think is an example. Furthermore, the environmentalist opposition to fracking seems even stronger in many European countries than in the United States.

Still, I am hoping that the shale revolution will pan out in at least some countries. Think how much difference it would make, say, to Ukraine's foreign policy if they were able to break their dependence on Russian gas.

Q: Gail Tverberg has written a recent article suggesting the world is suffering from high-priced fuel syndrome, which has the following symptoms:

• Slow economic growth, or contraction
• People in discretionary industries laid off from work
• High unemployment rates
• Debt defaults (or huge government intervention to prevent debt defaults)
• Governments in increasingly poor financial condition
• Declining home and business property values
• Rising food prices
• Lower tolerance for immigrants
• Huge difficulty in funding retirement programs, programs for disabled, and regular pension plans
• Rising international tensions related to energy supply

Do you think this is too convenient and an oversimplification of the problems facing world economies at the moment? What would you blame for the plethora of economic woes being experienced at the moment?