PHANTOM EFFICIENCY: U.S. Energy Consumption Is Well Below Peak, And That's Not A Good Thing

The US economy is consuming 2.00% less energy than its five year average seen prior to the 2008 financial crisis. Some will be cheered by this data, and indeed there are small nuggets of good news here. First, US consumption of oil—which turned flattish after the 2004 repricing—is down significantly, by over 10% since 2007. Also, as America turns increasingly to the power grid, consuming more natural gas and coal, the addition of renewable power from solar and wind is growing strongly. Eventually, these nascent trends will convert to larger structural changes. So let there be no doubt that energy transition is underway in the United States.

The problem remains, however, that in order to carry debt loads both public and private the US is still very dependent on strong industrial growth to generate revenues, and support wages. Accordingly, in the near term less energy inputs into the US economy more immediately aligns with less output. In other words, a more efficient economy is slowly being born. But until then, we will struggle with the transition. | see: US Average Annual Total Energy Consumption 1975-2010.


Now, there is a popular myth that has grown up in the past two decades the the US economy already transformed itself. This received wisdom holds that GDP rose while energy consumption per unit of GDP fell. That is certainly true in the narrow sense. But, not true in the broader sense. Here’s why: US domestic energy consumption which at one time was devoted to industrial production here in the US, is now simply offshored to Asia. The US economy still demands large units of energy which we simply import through manufactured goods. Worse, US GDP accounting still overweights consumption. This makes for a perverse, energy-accounting outcome: the more we offshore energy-consuming manufacturing to other countries, the more distorted our energy efficiency claims become, against GDP.

The notion that the US economy therefore is much less sensitive to energy shocks is also, therefore, a myth. We simply take the shock globally now, instead of acutely through our domestic manufacturing base (or what’s left of it.). Now that China has certainly passed through its first Lewis Turning Point, the Asian giant’s ability to combine cheap labour with cheap energy to produce its beloved and ruthlessly competitive manufacturing arbitrage is going to dissipate. Energy analyst Jeff Rubin has been discussing the inevitability of this turning point for several years.

Some words from Climate Scientist Garret at the University of Utah are useful here, writing as he often does about the Thermodynamics of civilisation Growth:

From a physics perspective it seems natural to suppose that economic wealth is an abstract representation of a capacity to do something. If so, then economic value, adjusted for things like inflation, should be directly proportional to the rate ( in Watts) at which civilisation consumes energy (e.g. coal, oil, uranium, etc.). Nothing in the universe happens without energy being transformed from one form to another. The global economy should be no exception.

Just as optimists who claim that global poverty is on the decline repeatedly make the mistake of using the USDollar as their unit of account, sustainability and green energy advocates make the same error when using US GDP to measure energy efficiency gains. Wake up: it’s all one world. And while some economies like Sweden and California do indeed have the right to champion their own efficiency victories, these economies—just as post-war South Korea which performed a miracle without any domestic oil—are still deeply interlocked to a global economy that’s running on fossil fuels.

While I’m heartened that US consumption of oil has fallen quite alot since 2007, and that we are building solar and wind power, do not be falsely cheered: all that “extra” oil we freed up simply went to the developing world, along with “extra” coal supplies as well. There, it is transformed into the manufactured goods that steam into US ports each day, which the US economy is still consuming. Again, the US economy has derived phantom “efficiencies” by plugging into cheap global labour–not cheap global energy.

As of 2010, the US economy was consuming 98.002 quadrillion btu of energy. This is a rebound from the dramatic low of 2009, which saw consumption fall to 94.578 million btu. But this is contraction, not efficiency. We will have our super-cool efficient economy eventually. Until then, the US economic motor is running slow.



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