Energy Is an Essential Good - Report Example

Energy economics Major: Audience: due: Summary This paper will look at how energy is an essential good. New technologies in energy will be discussed. Moreover, challenges facing the energy sector will also be investigated. Executive Summary Energy, being an essential good, has been in use since time immemorial. Energy is required by humans for them to be productive in the jobs they undertake. This is energy derived from the foods they take. Industries, on the other hand, require fuel to run machinery. The fuel is another form of energy. Energy can either be renewable or non-renewable. Derived from the continued use of energy, business opportunities have been developed to take advantage of the energy. There are also various technologies that are applied in the exploitation of energy. On the flip side of it, there are certain barriers to implementation of alternative sources of energy. Introduction Our economy is heavily dependent on energy. Energy is required to drive our production industries. This explains why an energy crisis is a big threat to our economies and results in deterioration of the economy. Energy, in this case, refers to both renewable such as solar and wind energy, and non-renewable energy that refers to fossil fuels. Governments universally have emphasized the need for sustainable use of energy since its value is very high. The vitality of energy in economic development is undisputable, and that is why the countries that use it well end up performing well. A case in point is Sweden, which has thrived from its electricity intensive industry (Banks 1). Energy consumption has been on the rise, due to the continued increase in the population. The increase in population has created a drastic effect on the demand for and price of oil. Electricity has become the second most prominent topic in energy economics worldwide after oil. This is because the rate of growth of electricity consumption is increasing faster as compared to the rates of growth of the fossil fuels (Banks 3). This paper will explore the whole idea of energy from an economics perspective. Bulk of energy Energy economics studies human utilization of energy resources as well as energy commodities and the consequences of the utilization. Energy commodities such as gasoline, diesel fuel, natural gas, and electricity can be used to produce energy, required by humans for their operations such as lighting, cooking, electronic activity and motive power. Some energy services can be provided by various energy commodities. For instance, homes can be heated using electricity, natural gas, or wood since each of these commodities is easily convertible to thermal energy. Energy commodities can, therefore, be used as economic substitutes for one another. The demand for a particular energy commodity acts as an increasing function of prices of other energy commodities (Watt Committee on Energy Publications 32). Energy economics investigates energy resources and energy commodities. This includes forces to motivate firms and consumers to supply, transport and use energy resources. Conversion technologies and costs also influence energy services by raising the energy demands. World oil prices have remained volatile as a result of Organization of Petroleum Exporting Countries (OPEC) market power. There is an increased need to use non-fossil energy sources so as to supplement fossil fuels. This is because eventually, the readily accessible and economically recoverable fossil resource base will be depleted. The other need to get alternative means of fuels is because conversion of additional large quantities of naturally available carbon to the atmospheric carbon dioxide could result in a rapid global climate change. Before an economical form of non-fossil fuel power generation emerges, the United States will have to depend fully on fossil fuel for power generation. Oil is more expensive than coal as a fuel for steam power plants (James 3). Energy is an essential good. From an economics perspective, an essential good is one for which the demand remains positive regardless of high prices. In a theoretical limit, for high prices, consumers would allocate a lot of their income to purchase an essential good. Energy, therefore, qualifies to be an essential good because the human activity would be impossible without energy. Living requires food embodying chemical energy. However, particular energy commodities are not essential because consumers can easily convert one form of energy into another. Solar energy, could, for instance, generate electricity or heat water. Electricity generated from solar can be used for cooking purposes. Demand for purchased energy by consumers can be reduced to zero, in the case of high prices of purchased energy. This makes purchased energy not to be an essential good (James 5). In the case of depletable energy resources, their economic cycle is complex. Such a cycle begins with innovations that allow the utilization of the resource. Technologies will keep on improving over time, partially guided by economic forces and public policy decisions though the improvement is in unpredictable ways. The location and magnitude of an energy resource base remain unknown, and exploration is required for identification of the resource deposits. The exploration is, however, costly. Firms may venture in the exploration of the proven reserves but cannot know with certainty the quantity or the extraction costs of the undiscovered resources. The opportunity cost would, therefore, depend on the future prices of the extracted commodity, but future commodity prices will depend on future demand and supply. This in turn depends on uncertain future discoveries that can, therefore, be very unpredictable (James 8). Technologies and initiatives were taken to conserve energy From the realization of the importance of energy, concerted efforts have been made to conserve it. For instance, the World Bank, USAID, and other donors have increased their funding levels for energy efficiency programs in the developing countries. This is particularly in response to global warming. The World Bank has taken the lead role in these initiatives. Its Global Environment Facility energy demonstration projects have been successful in spearheading the initiative on energy conservation. Moreover, greater emphasis is made in the marketing and commercialization of energy efficiency improvements, with a notable increase in technology demonstration, information exchange, and cost sharing programs between governments and the private sector. In North America, electric utilities have budgeted large amounts for customer-targeted efficiency investments (Fullerton para 8). Energy planners are in the process of investigating energy-efficient technologies capable of producing large, cost-effective savings when implemented on a large scale. The programs are to be implemented nationally or even in several nations simultaneously. Such technologies include hardware technologies such as efficient lighting, motors, pumps, and boilers. There are also software technologies that include building energy codes, appliance efficiency standards, technical information, and training materials. It is, however, unfortunate that most developing countries do not have energy codes and probably won’t have them in the next thirty years. This has necessitated a global program to develop a model for building energy code for the developing countries. This is to be followed by tailoring the codes to suit individual countries and regions. Much interest has been expressed in making energy production and consumption more efficient and less carbon intensive. Climate policy proposals have been put up to price the externality of energy so that the cost of energy includes all social costs. This approach has, however, presumed that the current energy prices paid by consumers already reflect private supply costs. For instance, residential and commercial gas customers have faced an average markup of more than 40 percent for the period over 1991-2007. Documents of manufacturing firms in the U.S have shown that the prices paid by these firms for electricity is so high. The marginal supply costs have exceeded the marginal prices for smaller manufacturing customers by more than ten percent (Fullerton para 10). The energy sector has been faced with challenges of market failures associated with technology innovation and diffusion. Policies aimed at accelerating the development and adoption of clean energy technologies have become an important component of the broad environmental policy. Federal production tax credit has been successful in increasing investment in wind energy development over the past few decades as a way of supplementing the hydro-power required in driving industries. Investment in energy efficiency and conservation has been a result of a series of market barriers, market failures, and cognitive failures. The distortions have helped to rationalize more prescriptive policy interventions, which include appliance standards and building energy efficiency codes. The EEE Program Members have evaluated the impacts of these programs and tested some of their underlying assumptions. For instance, the phase-in of building codes in 1983 has effectively reduced the residential electricity consumption. Researchers have used household-level billing data from Gainesville to conclude that the stringent energy code is associated with an economically significant reduction in electricity and natural gas consumption (Fullerton para 13). Environmental and energy policy can significantly affect employment, productivity, and growth, in addition to emissions and overall economic welfare. These policies affect the price and availability of natural resources, including fisheries, land, water, and petroleum. Environmental protection has important effects on technology, trade, and human health, all of which have a direct impact on the economic growth. This is because climate change can raise the annual mortality rate from 0.5 percent to approximately 1.7 percent. This is to be achieved by the end of the twenty-first century, something which can have a big impact on the economy (Fullerton para 16). Substitutability of energy can also be made possible by making use of an available set of energy conversion technologies. One conversion technology can be applied for one particular energy commodity. For instance, in home heating, a natural gas furnace cannot use oil, electricity, or wood. However, the degree of substitutability can be altered by use of new conversion alternatives. For instance, automobiles historically would use only gasoline or diesel fuel. Currently, there are technologies being developed that would allow the powering of automobiles. Commercialization of such conversion technologies will enhance substitutability in the transportation sector (Fullerton para 14). Business opportunities in the energy sector There are several ways of benefitting from the energy sector. The profit opportunities range from starting up business to investing in the private or public companies, as well as trading in the clean energy markets. For instance, an experienced trader may approach the energy sector from the point of trading in short-term or long-term energy stocks. The trader may even trade in the carbon credit markets. The energy industry is a new high-growth industry in which business opportunities are many. For instance, an electrical contractor specializing in servicing residential and commercial customers could add a wind or solar distributorship to the product he is offering. Economics as the driving change Energy has a direct effect on economic growth. Energy plays an all-powerful role in the natural world, and that is why it forms an important aspect of the economy. Human population forms a very important part of the economy. The entire human population is heavily dependent on energy. The Increase in human population results in a growth of the economy. The economy also grows, because many consumers mean more demand for commodities, and most of these commodities are produced using energy. It is in this regard that researchers have found a very important role for energy. There is a direct relationship between the growth of the economy and increase in population. The United Nations has forecasted a world population of over 9 billion by 2050, and over 10 billion by 2100. If this comes to be, the demand for energy will continue rising. External energy, including fossil fuels and nuclear, has added to total energy available to man (Ayres, Warr & International Institute for Applied Systems Analysis 62). Economics has had a major effect on creating a change in the energy sector. Overall economic welfare is affected by environmental and energy policies such as affecting employment, productivity, and growth, as well as emissions. Policies for environmental protection affect the value of ecosystem services. The willingness to pay for such services is dependent on changes in demand which for complementary market goods, where the demands can change with pollution regulations. Resultantly, partial equilibrium estimates vary from general equilibrium calculations. The calculations result in a major economic impact of environmental policies as the overall cost. For instance in the case of conserving air quality, the costs of conservation can be reduced by limiting driving more on high-ozone days, which can be achieved through the sale of fewer permits to drive on such days. From a study conducted by the EEE group on the distribution of costs of environmental policy, partial equilibrium was used to calculate the effects of increased energy costs on output prices, and finding regressive effects. Some researchers used computable general equilibrium (CGE) models to find effects on factor prices and output prices. Analytical general equilibrium can also be used with a few sectors to show how parameters affecting output prices and factor prices vary (Fullerton para. 14). Road blocks to adapting changes in energy use Energy technologies have a huge potential in the United States which can be realized at a reasonable cost. For instance, in the case of renewable energy, market research has shown that many customers will purchase renewable power even when it costs more than conventional power. However, the economic theory points to significant market roadblocks and market failures that will limit the development of the renewables unless special measures are put in place to encourage that development. The roadblocks can be categorized into four main categories (Union of Concerned Scientists para 1). The category of the barriers is that the use of energy is faced by new technologies competing with already mature technologies. Development of new renewable resources requires large initial investments to build infrastructure. The investments increase the cost of providing renewable electricity, especially in the early stages of the project implementation. For instance, permitting issues for conventional energy technologies is well understood and easy to follow. However, for the case of renewable energy new types of issues and ecosystem impacts are involved making the process difficult (Union of Concerned Scientists para 2). The second hindrance is market failure to value public benefits and renewables. Some potential customers may not readily accept the alternatives of conventional energy. They may instead opt to move to a new region as a result of increased prices of conventional power than adopt the introduced forms of renewable energy. Such a strategy can hurt the region’s long-term economic competitiveness (Union of Concerned Scientists para 2). The third barrier involves market barriers such as inadequate information, lack of access to capital. This is combined with high transaction costs for making small purchases. The implementers of an alternative form of energy may lack the required information about the market. Providers of conventional power may not be willing to share the vital information for fear of loss of market dominance (Union of Concerned Scientists para 2). The fourth barrier is price distortions from the existing subsidies and unequal tax burdens between renewables and other energy sources. This may discourage the providers of renewable energy, which may force them out of business (Union of Concerned Scientists para 1). Conclusion Energy is an essential good, and its conservation should be embraced by all. Human labor needs energy to thrive. The human labor is needed to drive the economy. From the exploration of energy in the discussion above, it can be noted that energy, both renewable and non-renewable has been facing serious challenges. The eventual depletion of the non-renewable energy is the main challenge which calls for concerted efforts to make good use of it. The renewable energy on the hand is faced with the challenge of non-acceptance and competition especially from already established conventional power providers. Works cited Ayres, R. U., Warr, B., & International Institute for Applied Systems Analysis. (2009). The economic growth engine: How energy and work drive material prosperity. UK: Edward Elgar. Banks, Ferdinand E. Energy Economics: A Modern Introduction. Boston [u.a.: Kluwer Acad. Publ, 2000. Print. Fullerton, Professor. “Environmental and Energy Economics.”Nber.org. 13 Apr.2015.Web.13 Apr.2015 James L.Sweeney. Economics of Energy. Department of Management Science and Engineering. Stanford University Union of Concerned Scientists. “Barriers to Renewable Energy Technologies.” Union of Concerned Scientists. http://www.ucsusa.org/clean_energy/smart-energy-solution. Retrieved on Web.14 Apr.2015 Watt Committee on Energy Publications (2004). Evaluation of Energy Use: Watt Committee Report Number 6. Taylor & Francis Read More