Insead Alumni Energy Network 22nd October 2011 by Benjamin Warr
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Insead Alumni Energy Network 22nd October 2011 by Benjamin Warr

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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 ...

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?

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Insead Alumni Energy Network 22nd October 2011 by Benjamin Warr Insead Alumni Energy Network 22nd October 2011 by Benjamin Warr Presentation Transcript

  • Dr Benjamin Warr, Senior Research FellowINSEAD Social Innovation Centre Sustainability GroupAlumni Reunion Energy Network Presentation22nd October 2011Energy and Wealth Creationbenjamin.warr@gmail.comhttps://sites.google.com/site/rexsgate/
  • 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
  • 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) Purchases Production of Consumption of Goods and Goods and Services Wages, Rents Services Invested (Energy Generating) Capital
  • US GDP actual vs. modeled using a 3- factor Cobb-DouglasGDP Index (1900=1) 25 20 US GDP 15 10 SOLOW RESIDUAL (TFP) 5 Cobb-Douglas 1900 1920 1940 year 1960 1980 2000
  • The Solow residual, US 1900-2010 Index (1900=1) 5.5 TFP (~1.6% per annum) 5 Unexplained Solow residual 4.5 4 3.5 3 2.5 2 1.5 1 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 year
  • 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.
  • Capital and useful work substitute forlabour: the rise of the energy slaves
  • Our approach SUPPLY USES EFFICIENCY45000 60% 40% Coal Heat (Hight Temperature) Electric Power40000 Heat (Low Temperature) Generation & Crude Oil and Petroleum 50% Mechanical Drive 35% Distribution Products35000 Electricity Natural Gas Light30000 40% Muscle Work 30% Non-conventional25000 Biomass (Food and Feed) 30% High Temperature 25% Industrial Heat20000 efficiency15000 20% 20%10000 Medium Temperature 10% Industrial Heat 15% 5000 0 0% 10% Mechanical Work 1900 1925 1950 1975 2000 1900 1925 1950 1975 2000 5% 45000000 Low Temperature Space Heating 40000000 Heat (Hight Temperature) 0% Heat (Mid Temperature) 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Heat (Low Temperature) year 35000000 Mechanical Drive Electricity 30000000 Light Muscle Work 25000000 USEFUL 20000000 15000000 WORK 10000000 Wastes 5000000 0 1900 1925 1950 1975 2000
  • Exergy (or maximum available work)The exergy flow from the Exergy Quality Indexsun, and the exergy stocks 100on earth create the resource 90base for human societies on 80earth. 70 60 50 40 30 20 10 0 t al ar m al ht t ic l g ea ia ea tin ic ic et ea le ig t H tH en tr m uc in nl ea St ec te he K t Su en N tH Po ot as El C bi H ic W m tr A is D Exergy reflects energy quality in terms of distinguishability and availability
  • EfficiencyEach transformation involves a loss of available energy (exergy)
  • Exergy is consumed to provide energyservices 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.
  • Exergy input share by source(US 1900-2000) 100% 90% Biomass (Food and Feed) 80% Non-conventional 70% Natural Gas 60% Crude Oil and 50% Petroleum Products 40% Coal 30% 20% 10% 0% 1900 1925 1950 1975 2000 Year Source: Ayres & Warr, 2009
  • Useful work by type(US 1900-2000) 100% 90% Muscle Work 80% Non-Fuel 70% Light 60% 50% Electricity 40% Mechanical Drive 30% Heat (Low Temperature) 20% Heat (Hight 10% Temperature) 0% 1900 1925 1950 1975 2000 Year Source: Ayres & Warr, 2009
  • Efficiency Evidence of stagnation •Pollution controls 25% •Technological barriers High Population Density •Ageing capital stock Industrialised •Wealth effects 20% Socio-ecological Regimes Japan Resource limitedefficiency (%) 15% US 10% UK Low Population Density 5% Industrialised New World Socio-ecological Regime Resource abundant 0% 1905 1925 1945 1965 1985 2005 year
  • Empirical and Estimated GDPUS 1900-2000 30 Empirical GDP 25 Estimated GDP 20 Using a LINEX production function with 15 useful work (exergy*efficiency) as a factor of production. 10 Corresponds to Cobb-Douglas with Capital share 0.57, Labour share 0.01and Useful 5 Work share 0.41. 0 Source: Ayres and Warr, 2009 1900 1925 1950 1975 2000
  • Our growth dynamic
  • 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)
  • Oil Supply 100 50Annual Discovery & Production 80 40 Annual Production (arbitrary units) (arbitrary units) Discovery 60 30 40 20 Production Yet-to-Find 20 10 Produced Reserves 0 0 -4 -1 2 5 8 11 14 17 20 23 26 29 32 35 38 41 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 Years Years From discovery to production Conv. oil peak is counter- takes~ 5 years, starting with intuitive. It occurs when the big and easy fields. production is rising, reserves are large, new fields are being discovered, & technology is increasing recovery factors. Source: Roger Bentley, University of Reading
  • Peak oil - fluctuating plateau - decline consumption exceeds discoveries since circa. 1980
  • Net Energy and EROEI
  • Impacts on oil priceLong-run costs increasing due to low elasticity of substitution and price
  • What effects efforts to increase energy productivity? For Business-as-Usual, (1.2% decay rate) – by 2025 Historical rate of decline in GDP doubles and exergy inputs 30 exergy intensity of GDP is 120 increase by half. 1.2% per annum 1.2% per annum r/gdp 1.3% per annum 25 100 1.4% per annum e/gdp 1.5% per annum 20 empirical 80 GDP (1900=1) With a 1.4% decay rate output doubles ~10 years later, butindex 15 60 requires ~50EJ less than 2010 levels 10 40 5 20 0 0 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 1950 1975 2000 2025 2050 year year
  • Possible trajectories for efficiency improvements 0.35 70 0.3 low 60 low mid mid high high 0.25 50technical efficiency (f) empirical empirical GDP (1900=1) 40 Scenario GDP growth (2030) 0.2 Low 0.4% yr-1 -2.0% 0.15 30 High 1.2% yr-1 2.2% Efficiency Scenarios 0.1 Low 0.4% yr-1 20 Mid 0.72% yr-1. 0.05 10 High 1.2% yr-1 0 0 1950 1975 2000 2025 2050 1950 1975 2000 2025 2050 year year For efficiency growth smaller than 1% p.a. we observe a future decline in GDP. The historical rate of improvement is 1.1% per annum.
  • Oil scarcity, growth, global imbalancesIMF , World Economic Outlook April 2011Figure 3.10. Alternative Scenario 1: Greater Substitution away from OilThis scenario considers a higher value forof demand (0.29, compared withdemand baseline scenario), consistent with greater subThis scenario considers a higher value for the price elasticity the price elasticity of 0.08 in the (0.29, compared with 0.08from oil. in the baseline). This is consistent with greater substitution away from oil. Benchmark scenario Upside scenario World Oil Exporter United States Emerging Asia Euro Area Real GDP Real GDP (percent difference) (percent difference) 1 1 1 2 1 0 0 0 0 0 -1-1 -1 -2 -1 -2-2 -2 -4 -2 -3-3 -3 -4 -6 -3-4 -4 -5 -8 -4 2000 05 10 15 20 2000 05 10 15 20 2000 05 10 15 20 2000 05 10 15 20 2000 05 10 15 20 2000
  • Oil scarcity, growth, global imbalancesIMF , World Economic Outlook April 2011Figure 3.11. Alternative Scenario 2: Greater Decline in Oil ProductionThis scenario considers the implicationsa more pessimistic assumption for the decline rate of oil production (3.8of oil production This scenario considers of a more pessimistic assumption for the decline rate percentage points annually, comparepercentage point in the baseline scenario). 3.8 percentage points annually compared with 1 p.p. in the baseline. Benchmark scenario Downside scenario World Oil Exporter United States Emerging Asia Euro Area Real GDP Real GDP (percent difference) (percent difference) 5 5 5 5 5 0 0 0 0 0 -5 -5 -5 -5 -5 -10-10 -10 -10 -10 -15-15 -15 -15 -20 -15 2000 05 10 15 20 2000 05 10 15 20 2000 05 10 15 20 2000 05 10 15 20 2000 05 10 15 20 2000
  • Oil scarcity, growth, global imbalancesIMF , World Economic Outlook April 2011Figure 3.12. Alternative Scenario 3: A Greater Economic Role for OilThis scenario considers a higher contribution of oil to output: 25 percent for the tradables sectorto output growth. in the baseline scenario) and This scenario considers a higher contribution of oil (compared with 5 percentnontradables sector (compared with 2 percent in the baseline scenario). 25% compared to 5% in baseline scenario – consistent with Ayres-Warr model. Benchmark scenario Downside scenario World Oil Exporter United States Emerging Asia Euro Area Real GDP Real GDP (percent difference) (percent difference)2 1 2 2 20 0 0 0 0 -1 -2-2 -2 -2 -2 -4-4 -4 -4 -3 -6-6 -4 -6 -8 -6-8 -5 -8 -10 -8 2000 05 10 15 20 2000 05 10 15 20 2000 05 10 15 20 2000 05 10 15 20 2000 05 10 15 20 2000
  • 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.
  • 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 dividends”
  • SourcesAyres, R.A. and Benjamin S. Warr, 2010. The Economic Growth Engine: How energy and workdrive material prosperity, Edward Elgar.Smil, V. 2007. Light behind the fall: Japan’s electricity consumption, the environment, and economicgrowth. Japan Focus, April 2.Cleveland, C. J. 1991. Natural resource scarcity and economic growth revisited: Economic andbiophysical 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. AmericanScientist, Volume 97, Number 3, Page: 230.IMF, 2011. Oil Scarcity, Growth and Global Imbalances. World Economic Outlook 2011.