December 24, 2007
Economic Snapshot — December 21, 2007
Surprise! Increases in energy efficiency lead to more, not less, energy use
Contrary to what most people believe, increases in energy efficiency usually mean a rise in energy consumption, not a reduction. This apparently counter-intuitive statement is supported by basic economic logic and was recently summarized in an article written by economists Jeff Rubin and Benjamin Tal of CIBC World Markets.
According to the Khazzoom-Brookes postulate first put forward by U.S. economist Harry Saunders in 1990, “energy efficiency improvements... that are economically justified on a micro level lead to higher levels of energy consumption at the macro level.”
As early as 1865, William Stanley Jevons (a pioneer of economic theory) observed that as technological improvements increased the efficiency with which a resource is used, total consumption of that resource has the potential to increase, not decrease.
For example, after James Watt introduced his more energy efficient coal-fired steam engine, coal became a more effective power source. This increase in efficiency in turn led to increased use of steam engines in industry and caused coal consumption to increase tenfold between 1830 and 1860.
In a more current context, Daniel Khazzoom observed that although demand for oil dropped immediately following the OPEC price shocks, it rebounded not long after.
In the United States, higher energy prices have led to a 30% increase in the average miles-per-gallon rating for a given vehicle. However, over the past 25 years, per vehicle fuel consumption has changed little. This trend reflects the fact that people now are able to travel greater distances in larger vehicles.
According to the CIBC article, air travel has followed a similar pattern. Higher oil prices have led to the development of more fuel-efficient aircraft and that development in turn has made air travel cheaper and more popular. As a result, there are more aircraft in the air using more fuel than ever before.
It appears that, as long as we are able to get more energy out of a barrel of oil (even a more expensive one), we will use more, not less.
John Clinkard has 30 years experience as an Economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
Average Vehicle Fuel Consumption vs Kilometers Per Litre
Data sources: EIA and CIBC World Markets.
Chart: Reed Construction Data — CanaData.
