Did energy cause this mess?

By Elisa Wood

March 11, 2010

Much of today’s economic debate boils down to these questions: How did we get in this mess? And how do we get out? Two recent studies implicate the energy industry as a cause and a solution.

While our economic tumble is clearly linked to an inflated housing market and overly-hedged financial products, we cannot discount pressure from high energy prices.

In fact, 10 out of the 11 U.S. recessions since World War II (including this one) occurred after oil price spikes, says “Reassessing the Oil Security Premium,” a discussion paper by Resources for the Future.http://www.rff.org/News/Features/Pages/Reassessing-the-Oil-Security-Premium.aspx

The Washington, D.C. think tank looks at price spikes caused by oil supply disruption and the economic reverberation. In particular, the paper analyzes oil externalities – the spillover effect of high oil prices onto those who are not players in the energy market.

It works like this. If I pay a lot of money for oil, not only do I take a financial hit, but so do my neighbors down the street, even if they buy no oil. This is because high oil prices lead to losses in gross domestic product and wealth transfers to foreign oil producers. In other words, my pricey oil purchase harmed the economy and therefore harmed my neighbors.

The report attempts to quantify the costs to society to keep oil flowing our way during worldwide supply disruptions. It calls this cost an “oil security premium.” The report estimates costs of $4.45 per barrel of oil consumed in 2008, rising to $6.82 in 2030 for imported oil. We’re damaged less by disruption in domestic oil supply, which carries a security premium of $2.28 per barrel in 2008 to $4.45 in 2030.

If the energy sector contributed to today’s economic slowdown, can it help lift us out?

We can improve our energy security somewhat by displacing imported oil with domestic oil. But an even better way to avert the pain is through energy efficiency, according to the paper: “Our estimates suggest that energy security is more greatly enhanced by policies to reduce overall oil consumption than by those that substitute domestic production for imports.”

Think about it. We’d be spared a couple of dollars per barrel by buying domestic instead of imported oil. But we’d be spared more than double that amount if we could forego the barrel completely.

Another analysis, released this week by the American Council for an Energy Efficient Economy, gets even more to the point about how efficiency can help our society financially. The advocacy organization looks at how many jobs energy efficiency programs create.

More specifically, ACEEE calculated the likely job creation from three programs under consideration before Congress. The programs include a residential retrofit program, also known as Home Star or “Cash for Caulkers,” and the commercial retrofit program, Building Star. Both programs would offer rebates for energy efficiency installations and improvements. The third program would offer $4 billion in energy efficiency grants for manufacturers. http://www.aceee.org/press/030810.htm.

ACEEE found that three efficiency programs could add 333,000 jobs in 2010 and 184,000 in 2011.

Steven Nadel, ACEEE executive director, points out that the job creation points out that these job figures “are probably conservative.” There is a bigger picture to consider: “We did not examine the impact of lower energy consumption on energy prices. When energy prices go down, money is freed up for spending in more labor-intensive parts of the economy.”

No sophisticated math here. These reports indicate that consumption carries a price tag, particularly when energy supply is low. High energy costs add to economic destabilization. Reducing energy costs – by reducing consumption – frees up money, which can help right the economy again.

Debate about the cause of the recession has focused heavily on problems within the financial arena. Maybe we’ve been too quick, this time around, to let the energy sector off the hook?

Visit Elisa Wood at http://www.realenergywriters.com/ and pick up her free Energy Efficiency Markets podcast and newsletter.