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by Valentino Piana (2004-2009)



1. Significance
2. Market structure
3. Determinants
4. Impact on other variables
5. Long-term trends
6. Behaviour during the business cycle
7. Policies
8. Data
9. Related papers


Energy is a key input for the production of goods and services. Physical capital uses energy to provide its contribution to production. Energy prices exert a wide influence on overall price level.

The energy sector is a heavy investor in R&D and it's particularly particularly open to innovation. Energy security, sustainability and environmental impact are major determinants of international relations.

Oil price, which tend to lead other fossil fuels, is key for pro-cyclical development in oil-producing countries, with high price generating revenues for the state and the private sector, imports and remittances benefitting further dependent countries.

However in oil-consuming countries (both developed and developing), it deteriorates trade balance, increases inflation and may cut GDP growth rates. Shale gas and oil produced in developed countries, meanwhile, can alter the geopolitics and price movement of conventional oil.

All in all, wide variation of oil price exert a destabilising influence on the world economy.

The transition towards renewable energy systems provides an horizon of stable low prices for electricity and reduced macroeconomic variations.

Market structure

In production and distribution of conventional energy, the cost structure exhibits usually strong economies of scale. Large firms cover most of the market, which turns out to be quite a concentrated oligopoly. In certain geographical areas and segments, there is even monopoly. For instance the electrical grid of a country is usually a monopoly. In certain countries, only one firm is allowed to import or to export energetic sources (oil, natural gas,...).

Energy is traded on a globalized market, declined with national regulations and taxation. The global price is unique, whereas taxation and geographical constrains can add to it for the final user.

By contrast, renewable source of energy, like solar and wind, can be harvested in a distributed small units, isolated or integrated in an adequated grid. In perpective, international and intercontinental connections can provide longer hours of sun and wind harvesting and storage.


The demand for energy is more or less proportional to GDP. Whether it is "more" or "less" depends on GDP sectorial distribution and their distinctive dynamics:

1. Agriculture is not energy-intensive, althogh the so-called "modernization through mechanization" increases the energy coefficient.

2. In traditional manufacturing ("plants"), energy is necessary for machines to work; thus, energy consumption follows production, although targeted technical innovations might reduce the burden;

3. In the tertiary sector ("offices"), energy is hardly an important input: computers use electricity but in pretty small quantities.

4. Transport is largely based on energy consumption, up to the situation of certain countries in which transport is a heavier consumer of energy than manufacturing.

To the extent GDP growth is generated by non-transport services, the energy demand will rise less than proportionally to GDP.

Energy productivity (i.e. the coefficient of energy for unit of output in a given sector) depends on the technology used. For instance, the energy needed for civil buildings is very high in skyscrapers and much lower in ecological architecture. In developed countries, rich and poor tend to consume the same amount of domestic electricity, so this expenditure item is irrelevant (in percentage) for the latter and (possibly) relevant for the former. Energy saving has been a frequent moral imperative, embedded in consumers' routines, quite irrespective of the actual price of energy.

All this makes energy demand quite inelastic in the short and medium term, thus fluctuations in energy supply results in violent movements in prices.

Governments try to control domestic energy price (through price cap, subsidies and tax changes) but their attempts are usually ineffective.

Impact on other variables

The energy price is a major determinants of variable costs in production. Its rise boosts the price level, generating inflation through at least four channels:

1. the growth in energy-intensive manufacture production costs;

2. the rise of transport costs;

3. the rise in prices of B2B purchased goods;

4. the direct increase in the energy bought by final consumer (es. petrol for cars).

If a country is not rich in energetic raw materials, the latter often represent a large share of imports. Accordingly, the rise in their price boost the value of imports, which are in this case particularly inelastic. Thus, the trade balance deteriorates. Developing countries that have to grow much faster than developed ones if they want to reduce the gap faces a further barrier: the middle class of entrepreneurs usually invests in cars (both as a means of production, for general purposes and as status symbol), thus a rise in oil and gasoline prices directly brings them back socially, squeezing their capability of investing in small businesses.

This generates pressures on government for subsidising energy prices (especially gasoline). Rising oil prices then lead to larger public expenditure, possibly contributing to public deficits. Periods of lower oil prices then help keeping the deficit under control.

For the few oil producers, a strong rise in prices would soar overall exports. Trade unbalances drastically change all over the world.

Profits in the oil industry usually goes with the price, as well as the tax revenue collected on oil products, since they are heavily taxed. By contrast, in all other industries, profits usually vanish and the recession hurts the tax revenue coming from corporate taxation and other sources.

Central banks may react to energy price rise with a policy of a strong currency (revaluation of exchange rate), possibly by keeping the interest rates high. This can even deepen the recession through a fall in exports.

Most of current energy sources are not renewable, forcing a limited time horizont to the sustainability of present fossil fuel logics. Present-generation nuclear energy as well is based on a non-renewable source.

The dominant production of energy is associated with a heavy pollution impact on the environment. CO2 emissions from fossil fuels and other sources are contributing to greenhouse effects and climate change, leading to rising sea level, ocean acidification, eco-systems' disruption and extreme weather events (e.g. hurricanes).

Several m ajor ecological disasters have been linked to the energy supply chain, as nuclear plants or oil-tankers, while climate change itself is a global menace for the present and future generations.

Some alternative sources can solve this problem in satisfactory way, such as water, wind and solar. Electric or air-compressed cars could be fueled by a distributed grid connected with clean energy production units, be they intermittent or not.

On a wider scale, one should remind tht large concentrated interests with a strong geographical bias result in some companies exerting a substantial external pressure on foreign governments directly of through the foreign ministry of their own country.

The uneven international distribution of oil and other key sources of energy, together with insane political management of relationships amongst nations, make them roots for wars in the world.

Long-term trends

Demand for energy is growing all the time, except during recessions and particularly deep manufacture contraction. Its rate of growth in Europe and North America has been less than was expected in the '60s and '70s, when the "Club of Rome" forecasted the exhaustion of non-renewable energy supply.

At the same time, Asia, due to its exceptional rate of growth, is taking a growing share of global demand of energy.

Meanwhile, world oil economically feasibile production is going to peak relatively soon, as investigated by this paper.

Behaviour during the business cycle

Energy use is moderatedly pro-cyclical. Energy supply follows price and inventory dynamics.


The Economics Web Institute has devised a new policy aimed at the fastest possible rate of adoption of new clean technologies, called "PRODINT" - pro-diffusion-of-innovation-tax. A special version of it has been presented at a Copenhagen conference. We are currently organising an International Symposium on "Innovative Economic Policies for Climate Change Mitigation", where reductions in energy-related emissions will be one of the hot topics.


CO2 emissions and other GHG emissions (41 countries; 1990-2005)

Energy consumption and production by country (1980-2002)

Oil prices

OPEC statistics

World energy statistics: a link

World Oil Market and Oil Price Chronologies: 1970 - 2003

2004 report on Arab Petroleum Exporting Countries by OAPEC

Elasticity of energy use to price and supply disruptions

Related papers

Peak oil: coming soon but when?

Sustainable energy security - a Chatham House report 2010

Promoting renewable energy in China and the world

Investment in electricity generation and its determinants

Energy for the future: renewable sources of energy - EU White Paper

Towards a European strategy for the security of energy supply - A White paper and the debate that follows.

Does it blow stronger in Europe? Current experience with supporting wind power in European electricity markets

The fuel cells case of cooperation reasons between firms and States within an emerging radical innovation

Barrier Removal to Malawi Renewable Energy Diffusion

New energy strategy for South Africa

Energy technologies for the 21st century
comparative study about different energy technological progress by WEC.


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