Energy Consumption: the Good, the Bad and the Economist

Energy Consumption: the Good, the Bad and the Economist

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«An economist is someone who gets rich explaining others why they are poor» «It’s sad to think of the number of students who have failed economy by not knowing things that have proved false» … and this is a small sample of the number of jokes about us… the economists. From time to time I «walk» around the www and I had a great time reading these jokes, in fact, sometimes I use some of them in my classes. However, I also like to think that economists are a kind of researchers, CSI type, since when we investigate a topic, we collect information, analyze it and try to identify it, or at least understand, the reality… this part of the economy is, sometimes, called «Positive Economics». Models, statistics, numbers, computers, etc.. everything is valid to decode the world we live… the search for evidence is, many times, our passion. Certainly there are people who do this work asking to the taxi drivers and housewives, others (the hermit type) do this task with official statistics … in any case, we are all in the task of understanding our world and its inhabitants. Well why start this way? Because this morning I read a paper (How pro-poor growth affects the demand for energy) that caught my attention and, because of that, I found a couple of statistics that I want to share with you.

First, we can start with an example. Assume for a moment that you are a young person, with a lot of dreams about the future, the world is at your feet and the only thing you have to do is faced with enthusiasm. However, things go wrong and suddenly your life becomes a daily struggle hard to bring some food home, your couple and children are deprived of the things you would like to give them… but (to don’t have a very sad history) love flows into your home. However, this home is very modest, small kitchen, maybe a small TV and probably cold nights, only the warmth of home is available. After a few years, life smiles you and suddenly you get a good job or business are finally paying the investment, now in addition to love, you want to give your family a lot things and – here’s the key – for that reason the small kitchen becomes the super «Millennium 2020» with ceramic parts and digital clock, instead of that little TV now the home has 2 plasma TVs, car, cold nights are calm with powerful electric stoves and, for that special night when the kids are asleep, a couple of bottles of wine with nice romantic music (thanks to the new stereo) will delight you and your couple.

This story reflects, in some way, what happens to the growing economies; when per capita income increases, so does the power consumption of the people, because… the new kitchen, plasma TV and the new car will undoubtedly increase the energy consumption. In this sense, should we be worried about something? The answer is usually yes, because if a country’s economic growth is accompanied by increase in energy consumption, it is necessary start the investment now.

In this context, it doesn’t  seems trivial to compare the growth rates of energy consumption with those observed in economic growth. Therefore I present the following chart, in it, using OLADE data, we can compare both growth rates for the period 2006-2011 for some countries in Latin America and The Caribbean. In this graph we see two areas, one blue and one green «clear», in the first (blue) are those countries whose economic growth was higher than energy growth, in the green area are those countries where economic growth was lower than energy consumption growth.

Of course, I invite all young people who read these lines to go deep into the explanation of this fact, however and to encourage discussion I suggest two reasons that could explain these results: one good and one bad. The good one comes from the paper that I mentioned before, the authors present the hypothesis in the typical economist numbing jargon, that » pro-poor economic growth causes an income energy consumption elasticity greater than 1.» As I tell my students: «See, that’s why people hate economists… «… ok, what is proposed in this paper is that when a country’s economic growth benefits the poor, energy consumption tends to be very high … because if a poor household receives money tends to be well equipped (TV, kitchens, stoves, cars, etc..), but if a rich household receives more income, no power consumption tends to rise, perhaps it will in other goods and services (travels to Europe, Gucci clothes, etc). Thus, under this hypothesis, in the green area countries would have «pro-poor» growth that is, the poor of these countries would, six years later, better… good news for Bolivia, Ecuador and Venezuela don’t you think?

However, there is also the «bad» explanation … or perhaps I should say «the evil one», it stems from the fact that countries that are in the green area «don’t save» energy because they have subsidized prices (for example, gasoline or LPG), which is why its inhabitants are «energy addicts». In fact, countries in the blue area tend to be more cautious with energy because they import it. Perhaps the explanation is in both positions correspond to an econometrician researcher give lights about it.

Well my dear friends, once again it was a pleasure to share these ideas and hypotheses with you. I want to comment that the countdown has begun, June is ending (very slowly for my taste) and gradually  July is coming and with it my return to Bolivia… was a nice experience (in this part of the world) but, I’m tired of this «skype» fatherhood.

Success and good health is my wish for this month.

Mauricio Medinaceli

Kabul June  4th, 2013

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