Definition of Energy Economics
People constantly think about the way computers have transformed human productivity, but they think less about what is taken for granted now: electricity and how much it changed the way business and life could be conducted. Electricity and power of all kinds are the difference between modernity and the Stone Age. Everything hinges on the energy that powers our world.
Our reliance on power gave rise to the importance of energy economics, such as the price of oil, its supply and demand and the growth of green energies since the availability and price of all these things are the foundation of business today.
OPEC stands for the Organization of Petroleum Exporting Countries, and its 14 member nations largely control the supply and demand of oil worldwide. Their actions in the 1970s made energy economics become a globally relevant field of study.
Energy economics is applying supply/demand economy to the often finite availability of energy sources and how that availability or lack thereof affects economic markets nationally and worldwide.
What do coal, solar, propane, lithium, natural gas, diesel, electricity, nuclear power, oil, wind and wave generation all have in common? They’re all forms of energy that are bought and sold around the world daily. They are the fuels that power everything from our cellphones to motorbikes to rockets. Without them, the world stops.
Back in 2003, the direct connection between money and energy was never more directly displayed than when the northeastern United States and southeastern Canada had a record-breaking power outage that at its peak affected over 50 million businesses and people, some for up to 14 days. The northeast blackout cost the economy over $6 billion — that’s the cost of everything from stores having food go bad to businesses having to shut down because they couldn’t run their processes. Even worse, an estimated 100 people died as a result of things like heart attacks from climbing stairs because elevators were out and getting killed in accidents because of not having traffic lights.
It's not quite as dramatic as a power outage, but when oil prices go up and down, for example, it affects nearly everything in life. Whole economies can crash when oil prices fall, like how Canada lost nearly 15% on its national currency overnight in winter 2015 when oil prices dropped — an economic cratering that hit any oil-producing country outside of OPEC.
High oil prices, on the other hand, mean that transported goods, particularly food and other staples, skyrocket in price because transport affects the product from start to finish. Take wheat, for example. It’s harvested by gas-powered combines and swathers, then sifted in electricity-powered plants and then driven by gas-powered vehicles to the next distribution point, where it might be train transported, driven, flown or shipped to regions around the world in vehicles powered by gas.
The wheat is then milled and baked, all thanks to electricity, and then packaged with products that were made and transported separately to that manufacturing plant via fueled vehicles. Then, it’s driven via gas-powered trucks or other transport to shops around the country. That’s at least four separate points in which the price of oil and gas impacts the price of a bag of bread — and don't forget that the plastic bag is made of petroleum too!
This happens throughout every facet of modern life, whether you’re talking cotton grown and picked for a shirt or wood cut down for a fire in the hearth. Gas and oil are present throughout the harvesting, making and transporting of every product on shelves around the world. That’s not hyperbole: it’s fact. While gas isn't the only fuel that affects markets, it's safe to say that energy economics plays out all around you every single day.
The folks who do the think tanking on issues of supply, demand, value and futures for energy sources around the world can go by a variety of names. They fall under professional societies involving minerals, economics and energy around the globe. They may call themselves mineral economists, energy economists, natural resource economists, environmental economists and even industrial organization economists.
Mineral economists are essentially the precursor to the wider-spectrum energy economists. The mineral economists took rise back in the 1930s as the world grew more concerned with mineral extraction as it applied to business and industry. In the 1970s, the energy crisis hit and some began believing the mineral economists took too narrow a view on elements of energy and that the studies were largely limited to America and select centers of academia.
Resource and energy economists, though, focused on broader topics like oil and electricity and covered a vast market with international participants. These academics and scientists really grew in prominence in the 1970s (after decades of unfettered access to oil), when gas became exorbitant and the entire economy collapsed.
In 1973 and 1979, Americans got a rude awakening as to the limits of governmental powers in controlling world markets. Oil prices skyrocketed as the OPEC nations throttled oil market supplies internationally. In 1973, they put oil in a choke hold to punish America for siding with Israel in the Yom Kippur War.
Just a decade before, America had been producing most of its own supply of oil, but its demand continued to grow, grow and grow. By the time OPEC put its foot down and cut supply, more than a third of America’s gas came from abroad. So, as availability evaporated and prices skyrocketed, it caused gas lines, business closures and lifestyle changes. Blocks-long lines at gas stations are as iconic an image of the 1970s as cardigans and flared jeans.
Such shortages have appeared periodically since then but without the disheartening lines at pumps. Oil, however, remains such an important commodity in daily life worldwide that energy economists hold sway over how currencies and markets act. This is especially true since the global population has nearly doubled since that crisis of 1973, and resources have become even more finite.
As climate change dominates the headlines worldwide, the future of energy is in question. Yes, the world will always need energy, but with innovations with things like solar power, wind power, wave generators and so on, energy markets will be changing. Today, homeowners can generate their own solar power and in some places sell energy back to the grid.
It’s hard to predict what that will do for what energy is needed from the states and at what rate. As green technologies like wind turbines become more popular, what happens to things like nuclear power plants? Until now, energy has almost always been generated in significant and ecologically impactful ways, like drilling for oil, flooding valleys for hydroelectric power, coal mining or building nuclear reactors.
The price paid has been high. Today, oil is still what powers the world, but electric and hybrid cars are growing in popularity every time oil prices surge. Then, there’s the new power plays by countries like India and Morocco, who are suddenly building the world’s largest solar panel arrays, and regions like the Scottish Highlands that may have land that is poor for anything but hiking and mining but where wind energy is turning a page. As time marches on, energy economists will define how markets process these energy stores internationally, whether they’re renewable or finite.
To stay abreast of news in this field, following the magazine The Economist is a good start for energy economics articles, and JSTOR has The Energy Journal, an industry periodical from the International Association for Energy Economics.