Sunday, January 10, 2010

The sawtooth of energy development: scarce resources vs technology

There are two very significant influences on the cost of energy. The first is the scarcity of resources and the second is technology. Actually these two influences affect many industries but they are particularly prevalent in energy.

Energy has always been one of civilisation's key inputs, technically being part of resources in the trinity of manufacturing (resources, labour and capital). Prior to civilisation there was also energy requirements but in those days energy was part of labour - manpower was it.

The advances of technology allowed man to use energy resources rather than doing it all himself, which meant doing more faster. In the earliest days moving energy was still organic, first oxen, mules and ponies and then eventually horsepower; but man soon learned how to harness the power of wind and water. Heat and light for a very long time had to come from burning stuff.

In the early days burning stuff was easy. There was plenty of organic material that burned well and it was all very handy. However, human populations didn't have to get very big before the readily available material started to be harder to find. In real terms this meant more time had to be spent find energy resources, which meant it cost increasingly more. This is one of the main influences of the scarcity resources. The more you need the harder it is to find and the more expensive it gets.

But scarcity of resources also affects technology. When wood becomes too expensive and everyone wants it then people will start to do two things:
  1. Try and work out how to get more heat from the same wood, and
  2. Try and work out what else can be burned.

The first thing helps reduce the cost of energy by making it more efficient. The second can make energy more expensive but far more available. For example, all other things being equal it is harder (and therefore more expensive) to mine coal than chop trees but you can get a lot more energy from coal (especially if you use your new energy efficiency techniques). In fact, while new energy efficiency techniques and sources of energy tend to reduce the per unit cost of energy they tend to increase the total energy bill. Rather than reduce energy consumption people usually find that they can do far more and so they do. Then the new fuel sources start becoming scarce (locally) and people have to explore for it further afield.

This sawtooth function is the way in which energy helps economies grow. At first energy is cheap and relatively plentiful and people make stuff for all they're worth. Then the energy starts to run out locally and they have to search and get energy from further and further away. As the energy gets more and more expensive then technology takes off and someone works out how to make the existing energy go futher. Rather than use less, though, as it's effectively cheaper, people use more. Then someone works out how to use another energy source that has high power and people flock to the easy sources of that fuel. Again the extra power from the technically advanced new fuel spurs greater consumption and then more expensive sources have to be found.

The energy leverage is not used to reduce costs it is used to increase benefit. More often than not when a household invests in a technically efficient energy device (such as air conditioning) their energy bill does not go down. Previously they spent what they were willing to on energy and put up with being a bit chillier or warmer than they would like. With the new technology the tend to be prepared to spend the same amount of money but be far more comfortable.

A similar thing occurs when one looks at household energy consumption. It's been pretty much the same for the last 20 years despite the efficiency of household appliances having increased significantly. Where 20 years ago people used a large amount of energy to be warm and have light and a few hours of television now people use a large amount of energy to be warmer, have more light, watch more television, use computers, bread makers, dishwashers, can openers, mixers, electric toothbrushes, games consoles, all kinds of musical devices, etc, etc. Rather than use technology to reduce energy consumption we get more from it; but there is increasingly more people and so energy demand goes up steadily draining the easy to get resources.

Technology has reduced the cost of energy in a relative sense, that is to say that energy would now be crippling expensive without it, but energy doesn't get cheaper because rather than slowly consume the easy to get resources we use the technology gains to do more and more.

This is the reality of any physical resource (which energy fundamentally is even if you can't see it). Technology keeps it accessible but the more you use the more you pay. The cost of energy will continue to increase, but it will do more and more for us all the time.