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Economics of energy


State and Local Economics

Local Economics of Energy in the United States:

Economies in Colorado, Utah and Wyoming will experience both benefits and challenges from a commercial oil shale industry.

Local Economic Energy Benefits:

  • Perhaps over 100,000 jobs created1
  • Increased direct and indirect economic activity
  • Increased real estate and business values
  • Increased tax revenues (property, sales, and severance)
  • Increased Royalties
  • Revenues for schools, roads, libraries, hospitals, community development, and other infrastructure

Local Economic Energy Challenges:

  • Insufficient local infrastructure in remote locales
  • Affordable housing
  • Adequate workforce
  • Potential displacement of some existing industries
  • Increased traffic

ECCOS believes that these economics of Energy challenges can be met. However, planning for these issues needs to occur right now, before a commercial oil shale industry commences.  We also need to keep in mind that any large commercial oil shale industry is likely decades away.  If such an industry develops, it will happen slowly and methodically, allowing economies to adapt and technologies to improve.

National Economics

Global oil issues will pose significant challenges to the United States economy in the coming years. According to the Task Force on Strategic Unconventional Fuels,

“America’s increasing demand for oil imports in a world of more limited supply from increasingly unstable sources poses strategic risks that the nation can ill afford to ignore …. To address this situation, aggressive action must be taken by government and industry to abate growth in U.S. oil demand and to increase production of fuels from domestic sources.”2
The Task Force identifies several key issues of national economic significance related to oil and energy.

  • Global Oil and Fuel Prices: The Task Force identifies increasing energy prices as a major challenge for the U.S. economy. As prices climb, consumers will use incrementally less fuel and find alternative sources. However, major price fluctuations also cause market disruptions, inflation, and inefficiencies that cost jobs and hurt our economy.
  • Costs of Imports and Balance of Trade: As the quantity of oil imports increases and the price of oil rises, the United States’ balance-of-trade is adversely impacted. The U.S. currently imports over 60% of our oil from foreign countries, many of whom are overtly unfriendly to the US like Venezuela.  Oil imports constitute a major proportion of our total Trade Deficit. In July 2008, when the price of a barrel of oil was over $147, oil imports constituted an astounding 84% of our Trade Deficit!3 Many also believe runaway trade deficits will have a detrimental impact on the value of the dollar, causing inflation and further harming our economy.
  • Economic Growth: Higher costs for energy will constrain growth, hamper job creation, and contribute to inflationary pressures in the United States. If Americans have to spend more money on energy – and remember energy is a component of almost every good and service – that is money we cannot spend or invest to grow the U.S. economy.
  • Oil Demand: Even with aggressive development of renewable and alternative energy sources, the EIS projects that World oil demand will increase 30% by 2035.  U.S. oil demand will increase by 14%..  However, demand in China and India will increase by well over 100%.  Consider this.  In America, about 80% of the population owns a car.  In China, only 3% of the population owns a car.  As these countries become more affluent, more people will own cars.  They’ll be small, efficient cars.  However, hundreds of millions of additional vehicles will be on the road, increasing the demand for oil, gasoline, and diesel.

In fact, many economists do not believe the current recession was caused by U.S. residential mortgage defaults or bank failures. These economists say this recession was caused by the energy price spike that occurred in 2008. In fact, these economists theorize that four (4) of the past five (5) recessions were caused by energy spikes.4 Creating more stability in energy prices through the development of oil shale could help insulate the United States from these damaging economic challenges.

Another key fact is the simple transfer of wealth that has occurred over the past several decades due to U.S. oil imports. According to a study commissioned by the Department of Energy and published by the Center for Transportation Analysis in the Oak Ridge National Laboratory in 2005, the United States has lost up to $8 trillion dollars of wealth in the 30-years from 1970 to 2004 solely due to oil imports.5 This represents a massive transfer of wealth to oil producing countries. And, keep in mind these numbers do not include the huge energy shock we experienced in 2007 and 2008.

The Department of Energy estimates that for every billion dollars of wealth that we transfer out of the country, we lose 21,000 jobs. If we apply this to the 8 trillion dollars lost, this equates to at least 168,000,000 jobs lost from 1970 to 2004. While this simple extrapolation points to an absurd number, the fact is that it is very likely that millions – even tens of millions – of jobs have perhaps been lost in the United States due to our irrational energy policies.

National Security:
Another facet of energy economics concerns national security. Putting aside the resources the U.S. expends to keep shipping lanes open (Persian Gulf and Straits of Hormuz) and maintain relative stability in unstable parts of the World, the U.S. military needs significant, secure and reliable sources of energy. In fact, the U.S. military is the single largest consumer of energy in the entire World. In 2006, the U.S. military purchased 312 million barrels of oil to meet its energy needs. The U.S. military fuels budget more than tripled from 2002 to 2006 – $3.8 billion to $13 billion.

Increased energy costs and tighter fuel supplies will hamper our military’s ability to keep the United States and the World safe.


Word Economics of Energy

The days of cheap oil are likely over. There will be fluctuations in the price of oil. However, the long-term outlook for oil and energy prices point straight-up due to increasing demand from both developed and developing nations and supplies subject to decreasing reserves of easily recoverable oil, supply disruptions, and uncertainty caused by political instability.

Oil Platforms at DuskIn addition, many talk about “Peak Oil” or that point when World oil production reaches a peak and begins to decline. At this point, global supply and demand ratios will cause oil price increases to accelerate even faster as demand continues to rise, but supplies are stretched and reserves depleted.  The World is probably not running out of oil.  But, we’re running out of cheap oil.  As this happens, we will be forced to look to more difficult, expensive, and unconventional methods of meeting our increasing oil demand.

According to the November 2008 IEA World Energy Outlook, output decline in existing oil fields will be 8.6% per year. To keep pace with expected demand, the World will need to bring on-line 64 million barrels/day of additional annual production. This is the equivalent of discovering a new Kuwait every year for the next 20 years!

Many believe we have already reached “Peak Oil.” Even optimistic forecasts state we will reach “Peak Oil” by 2020 without major new conventional oil discoveries, deep-water production, and development of unconventional fuels, like oil shale.

A commercial oil shale industry, along with other unconventional fuels, would push the date of “Peak Oil” out several decades, allowing us to develop other energy technologies that will power us into the 22nd century