The current kerfuffle around Iran has resulted in a sudden and severe shortage of oil in many places around the world – rich and poor alike. Like load-shedding in South Africa, this has led to the stark realisation that economies depend very closely on energy availability and stability.
Frans Cronje recently claimed there was no change in the inflation adjusted oil price (discounting very short-term spikes). However, when I looked, oil prices were up about 50%, and seem to have kept that average increase throughout the duration of the war with Iran. I also checked whether any countries were experiencing oil, petrol or gas shortages due to the war. Clearly many countries are, particularly those who get most of their energy from the Middle East.
Across the world, there is a strong relationship between per capita income (corrected for cost of living) and per capita use of energy. To be precise, the relationship is GDP pc (in 2023 International $) = 12,947*ln(kWh/capita/annum) – 94,203.
That equation explains 54.36% of $ per capita earned. The straightforward correlation of 0.733 gives a better idea of the strength of the association. It says 1 standardised unit of energy is associated with 0.733 standardised units of income. In the social sciences that is a very large effect and if one corrected for measurement error the association would be even tighter.
In effect the average person who uses 30,000 kWh per annum of energy would be earning $39,267 per year. An extra $10,000 per annum would require 116.5% more energy, or 2.165 times as much as before.
OK, but does energy use cause income, does income cause energy use or do both depend on some third variable?
I’ve thought about that and did a fair amount of research on the question. My conclusion is that it is mostly energy causing income. Yes, it is true that a country with a certain income needs a certain amount of energy to maintain it. However, it does not make sense to say people with a specific income would all just choose the same energy-intensive gadgets to amuse themselves.
It makes more sense to say income needs whatever energy it uses. Maybe the adoption of technology happened first and forced the need to produce the required energy. That seems a stretch. Is it not a risk to start a smelter business before you have a reliable source of energy? On the other hand, maybe the availability of excess energy suddenly made certain ideas possible when they were not before. That seems more likely since it would lower the risk.
Higher energy availability
Income generation depends on more than energy generation, so the association between energy use and income will not be perfect. Some countries earn more or less than expected, given their energy use. South Africa is one of those countries that earn much less than expected from their energy consumption. Nevertheless, our income could still benefit from higher energy availability.
There are two issues with SA energy production: we are producing less than we were, and we are not planning to produce nearly as much as we should.
In 2022 we were producing 72.2% as much energy per capita as we were in 2003. If we did no more than maintain 2003 levels of energy production, we would have had an income level 31% higher than it turned out to be in 2022.
Now there is a live government programme (the Integrated Resource Plan) aiming to secure energy availability in the future. The aim is to achieve a reliable supply that will meet the needs of the anticipated economy of the future. The problem is the anticipated future is modest and unambitious.
For many reasons, we need to do something meaningful to improve the lives and prospects of our population. These reasons include political stability and control of crime. We should be aiming to allow room, and encouragement, for a much higher growth rate – at least 4% per capita in real terms in my opinion. That translates into aiming for a 3.6-fold increase in reliable energy availability (an annual 6.6% growth rate), or 80,221.6 kWh per capita by 2046.
The current clean energy approach is insufficient by a large margin. I have previously argued that mitigating the effects of pollution or climate change is far more efficient than trying to stop them and would have better long-term outcomes.
We need to build and use more traditional power generation entities like coal and nuclear power stations. Coal has the advantage of already existing and relatively cheap inputs, and nuclear has the advantage of eventually being much larger and cleaner. After consulting experts, I suggest optimising the current coal power stations and building nuclear facilities as quickly as possible.
Sand in the gears
Clean energy should continue as an addition and not a replacement. If our aim is purely to achieve the energy goal (and it should be) we would be well advised to leave energy supply almost entirely to the private sector. Government should stay out of it because it is guaranteed to put sand in the gears of the process.
Government will no doubt argue that SA has other goals, such as, for example, immediate welfare for the poor. I agree but I think it is a bad idea to make business take on goals – charity, for example – that are outside its realm of expertise. The net benefits would be much greater if we let businesses dedicate themselves to solving the problem that is the reason for their existence, and relied on other ways, such as income subsidies, to solve the other problems. As Adam Smith demonstrated, specialisation and division of labour are very productive.
[Image: Zbynek Burival on Unsplash]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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