Oil vs. GDP

smiley · Fission Joined: Apr 16, 2004 Posts: 2126 Location: Europe

In a number of discussions I've heard the argument that we have become much more efficient in our use of energy. People state that the oil consumption as a function of the GDP growth is falling. In other words we need less oil to generate a higher overall GDP.

I'm wondering if that view might not be distorted. In the past decennia we have transferred a lot of our heavy industry to developing countries (mainly Asia). With that we have also transferred a lot of our oil usage to these countries.

I wonder we still produce more GDP growth with less oil if you account for this 'hidden' oil consumption.

Leanan · News Editor Joined: May 20, 2004 Posts: 4533

We probably have actually improved efficiency a little. But I suspect most of the "improvement" is just as you say - manufacturing done overseas, instead of at home.

They always talk about how we're less vulnerable to oil shocks because we're a services oriented economy now. But we're sure not using less manufactured stuff. We're using more than ever. The average American family has half the kids it used to, but lives in a house twice the size. The average household has more cars than kids. There are more cars than people in the U.S. And we have gadgets our grandparents never had. DVD players, computers, Nintendos, bread machines, food processors, wide-screen TVs, pasta makers, etc. My mom grew up without TV. When I grew up, if you didn't have color TV, you were considered backward. Now, you've got to have cable, if not satellite and HDTV.

So yes, we're importing a lot of "hidden" oil. In the form of steel rebar, bags of fertilizer, Beanie Babies, VCRs, foreign cars, Wal-Mart clothing, plastic toys, computers, etc. This is a big reason for our improved "efficiency" - but it's a false efficiency. Kind of like the way firing an American worker and hiring someone in India is considered an improvement in productivity, since employees who are outside the country don't count in the productivity calculation. You're getting more done with less people, so it's an "improvement."

pup55 · Expert Joined: May 26, 2004 Posts: 3692

Was thinking about this last night too. I think it would be more interesting to see "gdp vs. BTU". If you view a given economy as a black box, that inputs various types of energy (converted to common units) from one side, and spews out money from the other side, it would be interesting to know if there is a lot of variation from nation to nation. You would have to know the GDP's plus each nations's consumption of oil, gas, coal, nuke, hydro, and correct for coal and gas used to generate electricity. I tried to do it the other day but could not find good data on electrical generation.

I would not be surprised, for industrialized nations, if GDP vs. BTU input is fairly constant, and the "population" is just along for the ride. There might be some exceptions to this, some nations that are able to more efficiently convert their BTU's to GDP by use of efficient operations, etc. Of course for nations such as saudi, who are materials processors rather than industrial producers, these probably lie off the curve altogether.

But the implication of this is that if the industrial world's ability to generate money is directly related to energy use, and then you pull the plug suddenly, you get less money as output, no matter how many people you have.

nero · Posted: Fri Aug 13, 2004 9:58 am Post subject:

Another problem with GDP is that it grows when activities move from the informal to formal sector. I would love to find out what percentage of post war GDP growth was atributable to the increase in the number of wage earners due to wives moving from the informal to the formal economy. Children were cared for, food was prepared, clothes made and sick taken care of, and all of it without a cent changing hands. Another example is dishwashing machines. Before they were invented the dishes were still washed, but when dishwashing machines came along the activity now involved the purchase of an appliance. That purchase would increase the GDP even though the loss of employment by uncounted unpaid dishwashers did not subtract anything from the GDP.

I'm not sure how you strip this out of the numbers but it is a factor that leads to slightly strange results. If say when the baby boomers retire they all decide to not replace that second car that they had used for the husband to commute to work, it will have an enormous hit on the GDP but it doesn't mean that those boomers are poorer because they don't have that second car any more, it was a work related expense.

Another crazy example is that in the past couple of decades the increase in the length of the average commute has actually been a positive factor for the GDP. Before when the person got home faster, he saved on travel related expenses. This means he had a little bit more money that he might choose to save back then, assuming all other things being constant. Any money that he chose to save instead of consuming immediately reduced the velocity of money through the economy and thus meant the GDP was less.

Aaron · Posted: Fri Aug 13, 2004 1:01 pm Post subject:

Despite these efficiency gains we are consuming more oil & gas than ever before.

Think of all the conservation projects, billions in research and education, and engineering advances, over 40+ years... and we use more now than ever before.

Entire nations have instituted nuclear, solar, geothermal, biomass, public transportation, recycling, fuel taxes, and many other large scale efforts over decades... and still we consume more & more.

All of this effort... over all these years...

We are indeed like yeast...
_________________
"When you understand why you dismiss all the other possible gods, you will understand why I dismiss yours." - Stephen F Roberts.

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turmoil · Posted: Fri Aug 13, 2004 1:12 pm Post subject:

We should have seen this coming 100 years ago, when population started to expand.

I bet some saw it, but were silenced by the growing oil companies.

Soft_Landing · Heavy Crude Joined: May 28, 2004 Posts: 377

I'll just suggest a logical relationship that should hold.

When the comparitive advantage of oil (as an energy source) is attacked (as happened in previous oil shocks), then, through time, the relationship between oil use and GDP should weaken.

The corollary, of course, is that when the comparitive advantage of oil is high (during the mid to late 90's), the relationship between GDP and oil use should tighten.

The change in relationship between GDP and oil use should vary with infrastructure spending over that period of various comparitive advantage.

The moral of the story is: If cheap oil allowed the world economy to recover, then the recovered world economy is highly related to oil.

(This relationship need not hold, if world recovery was premised on oil use for production of alternative energy sources, for example, but, um.. well, yeah.)