04 Jun Energy consumption: The good, the bad, and the economist
“An economist is someone who gets rich by explaining to others why they are poor.”
“It’s sad to think of how many economics students have failed for not knowing things that turned out to be false.”
These are just a small sample of the many jokes about us… economists. Every now and then, I browse the internet and enjoy them; in fact, I often use them in my classes. However, I also like to think that economists are a kind of investigator, like those in CSI, because when we study a topic, we gather information, analyze it, and use it to identify—or at least understand—a certain reality. This part of economics is called Positive Economics. Models, statistics, numbers, computers, everything is valid when it comes to decoding the world we live in. The search for evidence is often our passion.
Certainly, some people conduct their research by asking taxi drivers and housewives; others, the more reclusive type, rely on official statistics. In any case, we are all engaged in the task of understanding our world and its inhabitants. So, why am I starting this way? Because this morning, I read a paper (How Pro-Poor Growth Affects the Demand for Energy) that caught my attention. As a result, I looked up a couple of statistics that I’d like to share with you.
First, as I like to do, let’s start with an example.
Imagine for a moment that you are a young man (or woman) full of dreams and eager for adventure. The world is at your feet, and it’s just a matter of facing life with enthusiasm. However, things don’t go well, and suddenly, your life becomes a daily struggle to put food on the table. Your partner and children lack the things you’d love to provide for them… To keep the story from getting too sad, let’s assume that love flows abundantly in your home.
However, this household is very modest—a small kitchen, maybe a tiny TV, and on cold nights, probably only the warmth of your family to keep you comfortable. After a few years, life smiles upon you, and suddenly, you land a good job or succeed in business. Now, in addition to love, you want to provide your family with many things—and here’s the key—so that small kitchen is replaced by the ultra-modern Millennium 2020 with ceramic parts and a digital clock. Instead of that tiny TV, your home now has two plasma TVs, a car, powerful electric heaters for cold nights, and—when the kids are asleep—a couple of bottles of wine and soft romantic music (courtesy of your new sound system) to enjoy with your partner.
This story somewhat reflects what happens in growing economies: when per capita income increases, so does people’s energy consumption. Because let’s be honest—new kitchens, plasma TVs, and cars inevitably mean higher energy consumption. So, should we be concerned? The answer is usually yes, because if a country’s economic growth is accompanied by higher energy consumption, it is crucial to ensure that energy supply will not be lacking in the future. This is why present-day investments in energy infrastructure are almost an obligation.
In this context, it is essential to compare the growth rates of energy consumption with those of economic growth. The following figure, using data from OLADE, allows us to contrast these two growth rates in several Latin American and Caribbean countries. In the figure, we can distinguish two areas: a light blue one and a green one. In the light blue area, we find countries where economic growth outpaced energy consumption growth—in other words, despite having more money, they did not “go overboard with the electricity, gas, or gasoline bill.” In contrast, in the green area, we see countries where energy consumption grew faster than the economy—again, put simply, in these nations, new wealth led to significantly higher energy bills.
Two Possible Explanations: One Good, One Bad
Of course, I encourage young readers to delve deeper into the explanation of this phenomenon. However, to spark discussion, I dare to propose two possible reasons for these results—one good and one bad.
The good explanation comes from the paper I mentioned earlier, where the authors state—using the typical sleep-inducing economist jargon—that: “pro-poor economic growth makes the income elasticity of energy consumption greater than 1.”
As I tell my students: “See? This is why people hate us… because we talk like that.”
Anyway, what the paper suggests is that when a country’s economic growth benefits the poor, energy consumption tends to rise sharply. This is because when a poor household receives more money, they invest in household appliances (TVs, stoves, heaters, cars, etc.). However, when a wealthy household gets richer, energy consumption does not increase as much—perhaps international travel or designer clothing does.
Under this hypothesis, the countries in the white area have experienced pro-poor growth—meaning that six years later, the poor in these nations are better off. Good news for Bolivia, Ecuador, and Venezuela, right?
However, there is also the bad—or perhaps I should say malicious—explanation. This one stems from the fact that the countries in the white area do not save energy because they have subsidized prices (for example, for gasoline or LPG). As a result, their citizens become “energy gluttons.” In contrast, the countries in the blue area tend to be more cautious with their energy use because they are energy importers—notice how the Central American countries stand out in this category.
Perhaps the truth lies somewhere between both explanations. It will be up to an ambitious econometric researcher to shed some light on the matter.
Well, my friends, once again, it was a pleasure to share these ideas and hypotheses with you.
To conclude, I’d like to mention that the countdown has begun, June is slowly (too slowly, for my taste) coming to an end, and soon July will arrive. And with it, my return home. It has been a wonderful experience (in this part of the world), but this “Skype fatherhood” is wearing me out.
Wishing you all success and good health this month.
S. Mauricio Medinaceli Monrroy
Kabul
June 4, 2013
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