Austan Goolsbee on Energy Independence

Lynne Kiesling

Because of the web site trauma here and the AEA meetings I am late to the party, but Austan Goolsbee’s NYT Economic Scene column from Thursday is a worthy read. He makes a point that I’ve made here several times: over the past 50 years we have increasingly gotten more bang for the buck out of every BTU of energy we consume. In other words, the number of BTUs per dollar of GDP has fallen over the past 50 years.

But the data shows that much has changed since the wrenching days of the 1970s, for American industry at least. The energy used for each dollar of gross domestic product in 1980 was almost 70 percent greater than it is today. While we have collectively wrung our hands over the decline of manufacturing in the country, it has also reduced the relationship between energy prices and growth.

Manufacturing industries consume about 25,000 B.T.U.’s of energy for each dollar of gross domestic product they generate. The most energy-intensive sectors, like the steel, iron ore and aluminum industries, consume about 70,000 B.T.U.’s. Outside of manufacturing, the economy uses less than 6,000. Hospitals, law offices and banks just are not the same as blast furnaces and smelters.

So now when the price of oil goes up, as when it almost hit $80 a barrel in 2006 (close to the highest it has ever been, even accounting for all the inflation since the previous energy crises), it does not automatically mean recession. Indeed, it caused only a ripple this last year. Unemployment and inflation both stayed quite low.

When I teach my freshman seminar on energy economics I start the course by showing them the Energy Information Administration data on this point, and I make them graph the data that show increasing total BTUs consumed, increasing real GDP, and decreasing BTUs/GDP. A very important point.

He then goes on to argue (somewhat obliquely) for increasingly stringent CAFE standards, with which I essentially disagree but I don’t want to get into now, but read for yourself and use his article as a reminder that this issue is nuanced and complex.


One thought on “Austan Goolsbee on Energy Independence

  1. Our energy efficiency is one of our competitive advantages relative to the Chinese. The Chinese waste a shocking amount of energy (among other things).

    When things stop being made here (or in Europe) and start being made there, often the labor makes it much cheaper, but the energy costs per unit are much, much higher. So higher oil prices have more of an effect on the Chinese than they do on American industry. Maybe this is why the Chinese government is working so hard to cut long term deals with oil producers all over the world. They can’t grow if oil is $80 a barrel or more.

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