Energy and money
22 Dec, 2008 12:59 pm
Is energy merely another commodity among many in the modern industrial economy? Or is it the very basis of our financial and material life?
But the confusion of money and true wealth often leads to another confusion, namely, the idea that energy is just one among many commodities in modern civilization, the importance of which can be judged by its price. In truth, energy is the master resource without which nothing else gets done. Even if that energy comes from our own physical labor, it must still be harvested and digested in the form of food before we can use it. But in modern society, the amount of energy from human labor that goes into our economic output is so small that it doesn't even register on a graph of energy sources. Almost all the energy that goes into our products and services comes from elsewhere, fossil fuels, hydroelectric, nuclear power, a very small contribution from renewable fuels, and, of course, the free contribution of the Sun in the form of crops, forestry resources and other biomass.
For the United States in 2006 the total expenditures for energy were 8.6 percent of GDP, according to the U. S. Energy Information Administration's 2008 Annual Energy Outlook. That's not inconsequential. But the importance of that expenditure far outweighs its size. If that energy were suddenly to become unavailable, the whole economy would collapse.
This implies that money is nothing more than the ability to command energy to do what we want it to do. This energy can be expended by people doing things we want them to do or by machines running on some form of energy with or without the assistance of people. The reason it is important to understand this is that modern neoclassical economics assumes that it is possible for money to conjure up substitutes for anything. Alas, there is no substitute for energy.
People like to believe that technology will allow us to find and develop the energy needed to grow the global economy. But even that technology presupposes an adequate energy supply to run the technology. And, while technology has enabled us to find and extract vast amounts of energy from the Earth in the form of fossil fuels, to build large dams to produce electricity, and to build nuclear power plants, there is no guarantee that this trend will continue indefinitely. And, simply throwing an abstraction like money at the problem of energy sufficiency won't necessarily produce the real thing. High potential profits give incentive to people to devise ways to get energy for society. But high potential profits do not guarantee their success.
Another critical nexus between money and energy is the connection between current consumption and savings. When we think of savings, we think of something that is put away somewhere for use at a later time. But savings aren't stored anywhere. They are lent out by banks for current economic activity with the promise that those savings will be returned over time with interest. The same is true of the supposed surplus now accumulating in the U. S. government's Social Security Trust Fund. That money is lent back to the government which spends it on current consumption. Savings in all their forms, stocks, bonds, pensions, bank accounts, and so on, are really nothing more than a claim on society's future production which means, in reality, a claim on future energy flows. Absent those flows, savings would be meaningless.
Despite its critical importance in our economic life, we currently pay only a small fraction of our total income for energy. This is because, for most of our fuels, the Sun and the Earth have done all the work of concentrating them for us in the form of oil, natural gas and coal, which make up 86 percent of world energy supply. Essentially, the Sun and the Earth worked for free for tens of millions of years to provide us with our current one-time abundance.
If at some point society is called upon to put a lot more labor into obtaining and processing energy sources, say, by growing most of them, in all likelihood prices for energy will be far higher than they are today. To complete the circle, that means that money, the value of which is dependent on energy, would be worth a lot less. This would express itself in high energy prices and high prices for goods and services produced in the non-energy sector of the economy. The non-energy sector would shrink as a percentage of the economy as energy production began to take up a larger and larger percentage of the workforce and the total economy.
Should this come to pass, we would be living in a far different society from the consumer-based one we now inhabit.