Energy Modelling: How to evaluate the importance of oil in economic growth?

Ikka Lavonius, Independent Consultant, Oxford

Vanity tempts us to use terms which imply the great importance of our particular field. For example, the label “Oil Age” now seems to appear even in titles of popular books. Some of these generalizations may have political significance. For instance, the phrase “the industrial nations that had based their economic growth upon oil” (Daniel Yergin, The Prize, 1991) suggests an analogy with coal and its reputation for playing a decisive role in the British Industrial Revolution, the very beginning of sustainable economic growth in the West.

Economic historians have recently challenged the role of coal as the causal factor in the Industrial Revolution. I believe that a comparable historical analysis of the various uses of petroleum products would demonstrate that, in the longer perspective, the importance of oil in economic growth would also fade, at least from absolute to relative.

One might think that a simple calculation using energy statistics, giving the share of oil in total energy consumption of an economy, would establish its importance. But that would be a blinkered view. Although different energy uses can be measured in equivalent units according to their heat content, all tonnes of oil equivalent in the economy are not direct substitutes for each other, and do not add value to the GDP with similar weight per thermal content. “An economic phenomenon deserves an economic approach” (Ralph Turvey and A. R. Nobay, ending their article “On measuring energy consumption” in The Economic Journal, December 1965).

For long-term economic growth per capita the main credit must go to cumulative technological progress, more to knowledge producers of previous generations than to ours. As an analogy to the new concept of General Purpose Technology (e.g. electricity) in economics, one could regard oil as a General Purpose Material: widely used for a variety of purposes, with scope for technological development and creating opportunities for new innovations. In order to be able to understand the role of oil in the improvement of productivity one needs to analyse its role in various chains of effects, rather than doing calculations at the highest level of aggregation.

This kind of analysis would be easier if we had a macroeconomic indicator of progress in energy efficiency. This indicator would be analogous to the common consumer price index, based on samples and having various subindeces. For this energy efficiency progress index, periodically collected information would be needed concerning the technical energy properties of a sample of goods and services. Instead of money price per package, you would need to record – for instance – how many litres of petrol are used per mile, and so on.