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Things To Come

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Things To Come

Unread postby vox_mundi » Wed 16 Nov 2016, 13:22:04

Relations Between Energy and Structure of the US Economy Over Time

If you care to understand how the “energy part” of our economy feeds back and shapes the “non-energy part” of the economy, then this blog is for you.

Essentially every energy analyst and energy economist should understand the results of this paper. Its findings have important implications for economic modeling as they help explain how fundamental shifts in resources costs relate to economic structure and economic growth.

This is a summary of a recent publication that has been accepted by Biophysical Economics and Resource Quality, a new journal from Springer: King, Carey W. Information Theory to Assess Relations Between Energy and Structure of the US Economy Over Time Biophysical Economics and Resource Quality, 2016, 1 (2), 10.

One of the major driving influences of the research behind this paper comes from a mixture of ideas from Charlie Hall and Joseph Tainter. Hall – an ecologist by degree – is seen by many as “Dr EROI” where EROI is ‘energy return on energy invested’ and is the most-common ‘net energy’ term for a calculation of how much energy you get for each unit of energy you use to extract energy. Tainter, an anthropologist, appreciates the concept of net energy and has applied it qualitatively to describe that more net energy and gross energy is required to enable the structure of ‘complex’ societies (mostly, but not entirely, in a pre-industrial context):

Energy gain has implications beyond mere accounting. It fundamentally influences the structure and organization of living systems, including human societies.” (Tainter et al, 2003)

Figure 1. After 2002, when energy, food, and water sector costs increased after reaching their low point, the direction of structural change of the US economy reversed trends, indicating that money became increasingly concentrated in fewer types of transactions.

Structural Shift 1 (1967 or 1972):

The change in trend around 1967 (could possibly be described as 1972) is that equality shifts from increasing to decreasing.

From 1945 until 1967/1972, both equality and redundancy were increasing. The US was increasing its power consumption (e.g. energy/yr) at about 4%/yr. That is to say, the US economy was booming after World War II gobbling up more and more energy every year at a high rate because energy (e.g. oil) was abundant and getting cheaper by the day.

The structural shift in the US economy can be explained by a few things that came to a head in the late 1960s and early 1970s:
- The US had little global competition for resources in the immediate aftermath of World War II (e.g. Europe and Japan were devastated and needed time to recover).
- Oil. Peak US crude oil production in 1970 enabled the Arab oil embargo of 1973, and OPEC’s increase in posted oil price in 1973 raised oil prices to such a degree as to cause major reactions to decrease oil consumption.
- Efficiency and environmental controls enacted for the first time. The Clean Air Act (1970) and Clean Water Act (1972) were substantially increased in scope and enforcement. The environmental and energy changes encouraged significant investment in utilities (e.g. wastewater treatment) and resource extraction along with a focus on consumer energy efficiency for the first time since industrialization.

Structural Shift 2 (2002):

One of the theories of ecologists (e.g. Howard T. Odum and Robert Ulanowicz) is that systems must have some “structural reserves” in existence to be able to respond to resource constraints or other disturbances that might occur in the future.

The major change that occurred in 2002 was that energy and food no longer continued to get cheaper. If you’ve followed my work, you know this already (see my blog from 2012). As I’ve stated in even more detail in my papers in 2015 (Part 2 and Part 3 of a 3-part series in Energies) this is the defining macro trend of the Industrial Era.

In response to this second structural shift from energy and food costs, it is clear that the US economy did trade off structural reserves for efficiency. Efficiency is the opposite of redundancy in Figure 1, so that the efficiency of the economy decreased all the way to 2002 after which it started increasing efficiency. The US economy decreased structural redundancy and equality for structural efficiency (e.g. increasing metrics of efficiency and hierarchy) after food and energy expenditures increased post-2002.

So after 2002, the US economy (and by my inference, the same thing is happening in each world economy overall) had to shift money into fewer sectors and fewer types of transactions.
- China had entered the World Trade Organization in 2001 and started to become the world’s manufacturer. This decreased monetary flows to domestic manufacturing.
- Financial deregulation in the 1990s, including the Gramm–Leach–Bliley Act of 1999 which repealed the Glass-Steagall Act, increased the monetary flows to the financial sectors.
- These two effects (China and financial deregulation) led to increased demand and speculation for energy and commodities, so that monetary flows increased to the oil and gas sector (remember the highest oil price of $147/BBL in July of 2008 during the height of the Great Recession) to meet US and global demand.

“There are three classes of people: those who see. Those who see when they are shown. Those who do not see.” ― Leonardo da Vinci

Insensible before the wave so soon released by callous fate. Affected most, they understand the least, and understanding, when it comes, invariably arrives too late.
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