Economics of Energy Summary

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Higher energy prices have direct and dramatic effects on the global economy. Because fossil fuels, especially petroleum, comprise the majority of our energy consumption, rises in oil prices have correlated closely with inflationary pressures. Though the US has successfully reduced its dependence on imported oil in the last decade (measured as energy consumption per dollar of the GDP), other countries have not been able to follow suit. Moreover, over half of the US total oil consumption is now imported, and this number continues to increase steadily into the future. As the price of oil climbs, other commodity prices will also increase, likely affecting prices of non-energy exported and imported goods, which in turn affects the global economy and may result in political instability in developing countries.

In the United States, government and business focus on the short-term profit motives and quarterly earnings and not much on long-term interests. Banks and other sources of funding will seek to receive a return on their investments in as early as a 3-5 year period, rarely exceeding 10 years. As a result, in many instances lack of clear immediate revenues will stifle innovation or give it away easily to foreign competitors. For example, during the 1970s when energy sufficiency and environment became a national security issue, the US spent a tremendous amount of resources to support research and development of renewable energy technologies such as solar photovoltaic, solar thermal power, and wind. In the 1980s, soon after the energy crisis subsided and oil prices dropped, so did the support for alternative sources of energy and environmental protection. The Reagan administration reversed the energy independence policy of the former Carter administration by slashing the federal research funds from $150 M to zero and much of their tax credits and subsidies as well. At the time, the United States was the leading manufacturer of solar cells and wind turbines. Japan and much of Europe capitalized on these inventions by buying American companies and at the same time developed long-term energy policies that reduced the imports of foreign oil and instead relied on the development of cleaner technologies and alternative sources of energy.

Today, Japan is the leading producer of solar cells and fuel cells, and over one-half of all hybrid and electric vehicles sold in the United States. Germany is the largest manufacturer of wind turbines. Spain and several other European countries are developing the next generation of solar thermal power plants. Unless the United States reverses its “cheap oil policy,” not only will its reliance on Persian Gulf oil increase, but much of its engineering ingenuity and know-how will be relegated to foreign competitors.


(1) Toossi Reza, "Energy and the Environment:Sources, technologies, and impacts", Verve Publishers, 2005

Further Reading

Colander, D. C., Economics, 3rd E., Irwin-McGraw-Hill, 1998.

Bosselman, F., Energy, Economics and the Environment, Second Edition, Foundation Press, 2005.

Energy Economics, Science Direct Elsevier Publishing Company. Publishes research papers concerned with the economic and econometric modeling and analysis of energy systems and issues.

External Links

United States Association for Energy Economics (

International Monetary Fund (

The World Bank (