The Energy Efficiency Paradox

If you become more efficient at your job, do you get to go home early? No. You’re given more work to do.

Same goes for energy.

Here’s something to consider when we’re being bombarded with public service announcements on energy efficiency. The following shows why better efficiency may not reduce consumption of energy.

Increased energy efficiency can have two outcomes within an economy:

1. The economy uses the same amount of energy, but at a lower cost.
2. The economy uses more energy, but at the same cost.

In a system with competing economies, businesses and individuals, outcome 2 is more likely.

Why?

Since energy usage drives economic growth, which is tied to corporate, political and military power, economic participants that are able to use more energy at the same cost will grow and become rich and powerful.

One can view oil as a form of capital, and energy efficiency as a return on capital. Greater energy effiency equates to a greater return on capital. As the return on capital increases, so too does the demand for capital.

Alternatively, one can also view energy efficiency as an energy subsidy. When something is subsidized, people tend to consume more of it. [In fact, energy subsidies are a growing problem in many OPEC countries where oil revenues are used to subsidize the cost of fuel. This has resulted in rampant energy use in these countries, and domestic OPEC consumption is increasingly competing with oil exports to America, Europe, China, etc.]

Greater energy efficiency leads to greater energy consumption…evidence?

Look at the US since the 1970s. Automobile fuel efficiency has increased dramatically, but this has not resulted in less fuel consumption. Instead, it has enabled greater consumption through economic growth and ‘innovation’:

• There are 130 million more drivers on the road in the United States today vs. 1970
• 2 and 3 car families have increased
• Annual miles driven per person is now about 12,000 vs. 9,500 in 1970
• There are more energy-consuming features in cars (e.g. air conditioning, on-board computers)

So, improvements in fuel efficiency resulted in more cars and greater car usage.

So how do we reduce consumption, assuming that is the goal?

We make oil and gas more expensive and develop cheap, efficient alternatives that don’t simply make it easier to consume traditional fossil fuels. That means solar, wind, hydro and geothermal are the answer.

Bottom line for investors:

1. Solar, geothermal, hydro, wind have huge potential over the next several years.
2. High oil prices will be the 'cure' that weans people off depleting oil resources.
3. As long as 'efficiency' (e.g. hybrid vehicles) is sought as a goal, rare earth metals provide a opportunity to to invest, as they are scarce and required to produce batteries.

Disclosure: Although no specific companies were named in this article, I am long many integrated energy companies. I am also long various rare earth elements mining companies.

Comments

[chap08:]

Energy efficiency is not all about vehicles. There are massive savings to be made in relation to housing for example. Let's say we use more efficient lighting. Are we going to use more lighting somewhere else as a result? No. All forms of energy are going to be plenty expensive enough in future to discourage demand. To date, demand has not really been discouraged. Apart from brief periods in the 70s and a little recently, US citizens have simply not factored energy usage in to their decision making. That will change. We need to be thinking about energy efficiency now so that our society has a chance of still functioning in future.

Sep 24 09:44 AM

[58robbo:]

Ferdinand E, what makes you believe the private sector is incapable of delivering nuclear energy? i don't see why you would want to punish someone who cycles to work, turns his lights, tv, ac, heat off when he leaves the house in favor of someone who drives a bohemoth everywhere he goes, leaves the ac on when he goes out of town on a month long vacation etc. make no mistake, i have no problem with someone driving a gigantic suv i just think it's immoral to expect me to subsidise it!

as a society we need to start paying the price it costs to deliver the goods and services we want. the idea that someone else must foot the bill for your excessive energy consumption and the bill for your self induced healthcare problems etc is what will sink this country

Sep 24 09:53 AM

[engstudent:]

Energy costs make up a small proportion of most people's total expenditure, therefore they are uninterested in making savings. This is evidenced by the large amounts of houses with poor insulation. Investments like insulation have very positive net present values but people don't invest in them due to either (a) inertia, (b) lack of information or (c) lack of finance.

These obstacles can be obviated if, as is now happening, utilities step in. Certain states (22:www.stateinnovation.or...) have some form of decoupling utility profits from the amount of energy they sell. This incentivising of energy efficiency is clearly the way forward.

As for transport use, increased taxes and higher oil prices will definitely help. Your road transport evidence proves a correlation but not a causation. Your hypothesis is argued against here: (reason.org/blog/show/d...), here(features.csmonitor.com.../) and here (www.google.com/url?sa=...). While there is some rebound effect from increased fuel standards, it is small and decreasing. A doubling of fuel standards leads to a 7% increase in driving according to the second link. People just aren't that fond of sitting in traffic.

Increased standards on buildings and cars is the way forward because the market has failed in this regard.

Sep 24 10:05 AM

[enigmaman:]

Neither light nor glasses will help those that refuse to see!


On Sep 24 09:10 AM jerrydd wrote:

> So much wrong here,
>
> On Sep 24 08:50 AM enigmaman wrote:

Sep 24 11:03 AM

[Fred W:]

"Increased energy efficiency can have two outcomes within an economy:

1. The economy uses the same amount of energy, but at a lower cost.
2. The economy uses more energy, but at the same cost."

Nonsense...and your facts to back up this claim do not provide support. This would mean that lowering operational costs is NOT part of the equation...OBVIOUSLY there is another possible outcome: the economy uses less energy and pays a lower price for that energy. Just look at this year's data if you have any doubts...LESS energy has been consumed at LOWER prices--you need to go back to the drawing board on your premise.

Sep 24 11:17 AM

[58robbo:]

taxation to drive up the cost of fossil fuel prices is not the way to go. fuel standards are not a joke, they are a total joke! the most misguided comment of yours however is that the market has failed in this regard!

taxation to artificially inflate oil prices is the fastest way to get another dubya back into the white house. period! the same goes for cafe and building standards! if people don't voluntarily give up their suv's and the govt forces them to, not only is that an Orwellian, unAmerican solution but you'll have the fight of the century on your hands.

the govt has to flat out stop funding oil and gas exploration. it has to stop funding energy infrastructure, refining, even should stop financing energy research including alternatives. when they do this, they reintroduce risk back into the energy business and that is how prices go up. when prices go up you then have fertile ground for alternatives.

i personally believe that the solutions to our energy issues will not come from government funded research labs and think tanks but rather from the backyard inventors looking to save and make a buck or two. i have never been more convinced of this especially when oil went to $150, the activity was incredible. gasification, ev conversions, people harvesting palm, producing algae, re-using french fry oil, insulating their homes etc. it also encouraged me to see the no brainer savings which don't require rocket science eg drying clothes on a line, switching off tvs when not in use, caulking gaps in window frames. walking, cycling, etc

perhaps you might dismiss my idealism, but before you do take a walk around your house and consider how much of the technology which you can't live without had humble beginnings in someone's shed.


On Sep 24 10:05 AM engstudent wrote:

> Energy costs make up a small proportion of most people's total expenditure,
> therefore they are uninterested in making savings. This is evidenced
> by the large amounts of houses with poor insulation. Investments
> like insulation have very positive net present values but people
> don't invest in them due to either (a) inertia, (b) lack of information
> or (c) lack of finance.
>
> These obstacles can be obviated if, as is now happening, utilities
> step in. Certain states (22:www.stateinnovation.or...)
> have some form of decoupling utility profits from the amount of energy
> they sell. This incentivising of energy efficiency is clearly the
> way forward.
>
> As for transport use, increased taxes and higher oil prices will
> definitely help. Your road transport evidence proves a correlation
> but not a causation. Your hypothesis is argued against here: (reason.org/blog/show/d...),
> here(features.csmonitor.com.../)
> and here (www.google.com/url?sa=...;source=web&ct...
> While there is some rebound effect from increased fuel standards,
> it is small and decreasing. A doubling of fuel standards leads to
> a 7% increase in driving according to the second link. People just
> aren't that fond of sitting in traffic.
>
> Increased standards on buildings and cars is the way forward because
> the market has failed in this regard.

Sep 24 11:30 AM

[NumbersGuy:]

As someone above pointed out, using automobiles as an example for efficiency doesn't really cut it. In fact, MPG's on average went down over the last decade or so thanks to the popularity of the SUV, which was driven by strange exemptions to CAFE standards for light trucks. Market distortions at work,

I don't have the hard data in front of me, but California has had hard efficiency standards for 30 years. The argument that they haven't decreased energy use is solid, but the energy per capita use is much lower in California than the rest of the US and they have, as a result, avoided building power plants they would otherwise have needed.

Sep 24 11:48 AM

[58robbo:]

imagine how much less they'd have consumed if the govt wasn't subsidising the real cost!


On Sep 24 11:48 AM NumbersGuy wrote:

> As someone above pointed out, using automobiles as an example for
> efficiency doesn't really cut it. In fact, MPG's on average went
> down over the last decade or so thanks to the popularity of the SUV,
> which was driven by strange exemptions to CAFE standards for light
> trucks. Market distortions at work,
>
> I don't have the hard data in front of me, but California has had
> hard efficiency standards for 30 years. The argument that they haven't
> decreased energy use is solid, but the energy per capita use is much
> lower in California than the rest of the US and they have, as a result,
> avoided building power plants they would otherwise have needed.

Sep 24 12:06 PM

[WayneS:]

The purpose of subsidies is to raise tax revenues. For every dollar of subsidy the government reneges on, they will lose 5-50 dollars of tax revenue.
Most refineries don't use outside energy, they make their own from previously wasted heat.
Vehicles that get greater than 30 mpg have been around for 50+ years. People want intimidating vehicles, not transportation.
Everyone is capable of saving at least a thousand dollars a year with efficiency, but choose not to save.

Any change to the status quo will be a hard sell.

Sep 24 12:59 PM

[CMMF:]

I like the idea of saving money by not subsidizing someone else's energy consumption. But why stop there? I don't want to pay for your kids school. Or for helping disaster victims. Or clean water in third world countries, etc. You might not draw the line where I do.


On Sep 24 09:53 AM 58robbo wrote:

> Ferdinand E, what makes you believe the private sector is incapable
> of delivering nuclear energy? i don't see why you would want to
> punish someone who cycles to work, turns his lights, tv, ac, heat
> off when he leaves the house in favor of someone who drives a bohemoth
> everywhere he goes, leaves the ac on when he goes out of town on
> a month long vacation etc. make no mistake, i have no problem with
> someone driving a gigantic suv i just think it's immoral to expect
> me to subsidise it!
>
> as a society we need to start paying the price it costs to deliver
> the goods and services we want. the idea that someone else must
> foot the bill for your excessive energy consumption and the bill
> for your self induced healthcare problems etc is what will sink this
> country

Sep 24 05:06 PM

[Plan B Econ...:]

Less energy has been consumed at lower prices this year because of a massive recession. But energy consumption was already falling as oil prices peaked in 2008.

But let's make a distinction between fuel efficiency and absolute energy prices, because my point above is centered around efficiency.

The point is this: improved fuel efficiency (i.e. output per unit of energy) doesn't result in less fuel consumption. 40 years of data support that improved fuel efficiency has simply provided Americans a reason to drive more and bigger.

My point absolutely has to do with operating costs. Greater efficiency implies a higher return on capital - thus a higher output per unit of fixed costs.

Greater energy efficiency is tantamount to improved ROIC. A person/business/economy with higher ROIC seeks to produce more, not less.


On Sep 24 11:17 AM Fred W wrote:

> "Increased energy efficiency can have two outcomes within an economy:
>
>
> 1. The economy uses the same amount of energy, but at a lower cost.
>
> 2. The economy uses more energy, but at the same cost."
>
> Nonsense...and your facts to back up this claim do not provide support.
> This would mean that lowering operational costs is NOT part of the
> equation...OBVIOUSLY there is another possible outcome: the economy
> uses less energy and pays a lower price for that energy. Just look
> at this year's data if you have any doubts...LESS energy has been
> consumed at LOWER prices--you need to go back to the drawing board
> on your premise.

Sep 24 05:48 PM

[nRG:]

this outcome of forms of technological efficiency is referred to by some authors as the Jevons Effect or Jevons Paradox

Sep 24 06:57 PM

[Plan B Econ...:]

Thanks! I didn't know that - I look forward to reading more about the Jevons Paradox.

Here's the Wikipedia description: en.wikipedia.org/wiki/...


On Sep 24 06:57 PM nRG wrote:

> this outcome of forms of technological efficiency is referred to
> by some authors as the Jevons Effect or Jevons Paradox

Sep 24 08:58 PM

[engstudent:]

Plan B, it's all there, in an excellent Wikipedia entry. Do you claim that the rebound effect of efficiency is greater than 100%? Or do you claim that overall, once faster economic growth is considered, that energy use increases? Do you have any sources as to the actual percentages?


On Sep 24 08:58 PM Plan B Economics wrote:

> Thanks! I didn't know that - I look forward to reading more about
> the Jevons Paradox.
>
> Here's the Wikipedia description: en.wikipedia.org/wiki/...
>

Sep 24 10:01 PM

[58robbo:]

Spending on education has skyrocketed in recent decades and yet our kids seem to be falling further behind! if you ask me, the only thing they seem to learn is a sense of entitlement! the third world doesn't need US taxpayer funded clean water schemes. it needs the imf and world bank to stop crippling them with debt. a debt which sees the lions share of their economic output sold to the 1st world for a pittance to service that debt! helping disaster victims? you must be kidding? did you not see the wonderful job that fema did in new orleans? not only did they not do anything, but they hampered everyone else from doing anything too. if you go to the area now you'll will see that private charities, i know it's hard to believe in humanity, have added the greatest relief!


On Sep 24 05:06 PM CMMF wrote:

> I like the idea of saving money by not subsidizing someone else's
> energy consumption. But why stop there? I don't want to pay for your
> kids school. Or for helping disaster victims. Or clean water in third
> world countries, etc. You might not draw the line where I do.

Sep 25 03:48 AM

[Heyya:]

This was a great look at a different perspective on energy efficiency. Thank you for introducing this perspective. The article was very well written, clear and concise.

Sep 25 12:06 PM

[Plan B Econ...:]

Thank you.


On Sep 25 12:06 PM Heyya wrote:

> This was a great look at a different perspective on energy efficiency.
> Thank you for introducing this perspective. The article was very
> well written, clear and concise.

Sep 25 05:19 PM

[Mayascribe:]

Formula: Tax gasoline more. Use taxes to build nukes (create jobs). Use nuke's electricity to power cars = Less dependency on foriegn energy sources + more working taxpayers.

Israel's doing this. The French are doing this. Norway is doing this. Why can't the USA? This country needs a paradigm shift in its energy policies, fast.

Sep 26 06:33 PM

[Plan B Econ...:]

I'd add to this...build more and better public transportation.

30% of Europeans don't drive vs. 10% of Americans. Why? Because you don't really need a car to get around in Europe.


On Sep 26 06:33 PM Mayascribe wrote:

> Formula: Tax gasoline more. Use taxes to build nukes (create jobs).
> Use nuke's electricity to power cars = Less dependency on foriegn
> energy sources + more working taxpayers.
>
> Israel's doing this. The French are doing this. Norway is doing this.
> Why can't the USA? This country needs a paradigm shift in its energy
> policies, fast.

Sep 27 10:54 PM

[58robbo:]

having government subsidize or fund nuclear energy does little to encourage energy saving on the part of the consumer. in the minds of the consumer, the environmental impact will have been dealt with, the energy independence issue would have been handled and with the price being lower than it would cost to produce (ie, it would be subsidized by those purchasing gasoline) would amount to consumers not even considering their consumption. this has been the road followed by the last 10 administrations. all you're doing is switching from one finite resource to another (uranium, plutonium etc are not in infinite supply) and kicking the proverbial can down the road


On Sep 26 06:33 PM Mayascribe wrote:

> Formula: Tax gasoline more. Use taxes to build nukes (create jobs).
> Use nuke's electricity to power cars = Less dependency on foriegn
> energy sources + more working taxpayers.
>
> Israel's doing this. The French are doing this. Norway is doing this.
> Why can't the USA? This country needs a paradigm shift in its energy
> policies, fast.

Sep 28 07:29 AM