Executive Briefings

Increases Predicted for Long-term Energy Costs

Although gas prices are temporarily low at the pump, long-term energy costs are on the rise. According to State of the World 2015 contributing author Nathan John Hagens, a former hedge fund manager who teaches human macro-ecology at the University of Minnesota, nations are papering over those costs with debt. Higher energy costs are leading to continued recessions, excess claims on future natural resources, and more-severe social inequality and poverty.

The relatively low cost of energy extraction compared to the benefits obtained from fossil fuels has been perhaps the most important factor in the industrialized world's economic success. Historically, large quantities of inexpensive fuels were available even after accounting for the energy lost to extract and process them. But, as remaining fuels become less accessible, higher energy costs will have ripple effects through economies built around continued large energy-input requirements. Rising costs will endanger highly energy-intensive industries and practices – including the energy sector itselfas well as widen and deepen poverty as everything becomes more expensive.

"Despite having 'plenty of energy,' higher physical costs [of extraction] suggest that energy likely will rise from a historical average of 5 percent of GDP [gross domestic product], to 10 to 15 percent of GDP or higher," says Hagens.

In the short term, nations are taking on growing debt to avoid losses in GDP--- an indicator of the economic health of a country. Since 2008, the Group of Seven nations (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) have added about $1tr per year in nominal GDP, but only by increasing their debt by over $18tr.

However, continued use of credit to mask the declining productivity of energy extraction is unsustainable. For each additional debt dollar, less and less GDP is generated, and, at the same time, our highest-energy-gain fuels are being depleted. Energy is becoming more expensive for the creditor in the future than for the debtor in the present.

"We have entered a period of unknown duration where things are going to be tough," says Hagens. "But humanity in the past has responded in creative, unexpected ways with new inventions and aspirations." While policy choices such as banking reform, a carbon and consumption tax, and moving away from GDP as a proxy for well-being are good long-term ideas, "we urgently need institutions and populations to begin to prepare...for a world with the same or less each year instead of more."

More information on Worldwatch's State of the World 2015 report is available, click here.

Source: Worldwatch Institute

The relatively low cost of energy extraction compared to the benefits obtained from fossil fuels has been perhaps the most important factor in the industrialized world's economic success. Historically, large quantities of inexpensive fuels were available even after accounting for the energy lost to extract and process them. But, as remaining fuels become less accessible, higher energy costs will have ripple effects through economies built around continued large energy-input requirements. Rising costs will endanger highly energy-intensive industries and practices – including the energy sector itselfas well as widen and deepen poverty as everything becomes more expensive.

"Despite having 'plenty of energy,' higher physical costs [of extraction] suggest that energy likely will rise from a historical average of 5 percent of GDP [gross domestic product], to 10 to 15 percent of GDP or higher," says Hagens.

In the short term, nations are taking on growing debt to avoid losses in GDP--- an indicator of the economic health of a country. Since 2008, the Group of Seven nations (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) have added about $1tr per year in nominal GDP, but only by increasing their debt by over $18tr.

However, continued use of credit to mask the declining productivity of energy extraction is unsustainable. For each additional debt dollar, less and less GDP is generated, and, at the same time, our highest-energy-gain fuels are being depleted. Energy is becoming more expensive for the creditor in the future than for the debtor in the present.

"We have entered a period of unknown duration where things are going to be tough," says Hagens. "But humanity in the past has responded in creative, unexpected ways with new inventions and aspirations." While policy choices such as banking reform, a carbon and consumption tax, and moving away from GDP as a proxy for well-being are good long-term ideas, "we urgently need institutions and populations to begin to prepare...for a world with the same or less each year instead of more."

More information on Worldwatch's State of the World 2015 report is available, click here.

Source: Worldwatch Institute