Routledge Handbook of Energy Economics

Uğur Soytaş, Ramazan Sarı, Uğur Soytaş, Ramazan Sarı

• Publisher: Routledge
• Year: 2019
• Print ISBN:
  9781138208254
• eBook ISBN:
  9781315459639
• Topic: Economics
• Subtopic: Business General
• Index: Economics

Energy consumption and production have major influences on the economy, environment, and society, but in return they are also influenced by how the economy is structured, how the social institutions work, and how the society deals with environmental degradation. The need for integrated assessment of the relationship between energy, economy, environment, and society is clear, and this handbook offers an in-depth review of all four pillars of the energy-economy-environment-society nexus.

Bringing together contributions from all over the world, this handbook includes sections devoted to each of the four pillars. Moreover, as the financialization of commodity markets has made risk analysis more complicated and intriguing, the sections also cover energy commodity markets and their links to other financial and non-financial markets. In addition, econometric modeling and the forecasting of energy needs, as well as energy prices and volatilities, are also explored. Each part emphasizes the multidisciplinary nature of the energy economics field and from this perspective, chapters offer a review of models and methods used in the literature.

The Routledge Handbook of Energy Economics will be of great interest to all those studying and researching in the area of energy economics. It offers guideline suggestions for policy makers as well as for future research.

Part I
Energy and economy

1
Energy demand

Govinda R. Timilsina

1 Introduction

Energy is a vital input to economic development and human well-being (Goldstein et al. 1997; Csereklyei et al. 2016). In the absence of access to modern energy resources (electricity, petroleum), the economic development achieved today would not have occurred. Similarly, human life has become so dependent on energy – particularly electricity – that human survival would be extremely difficult if not impossible in the absence of energy, especially in developed countries. Being a basic need of the economic growth and social welfare, energy demand increases along with increasing economic growth and improved quality of life or living standards.

Energy demand has been ever increasing along with economic growth and its role in economic development has remained critical over the last two centuries (Goldstein et al. 1997; Stern and Kander 2012). Many economic historians believe that coal was one of the key drivers of industrial revolution in Britain (Church 1986). Since 1971, when the International Energy Agency (IEA), the energy wing of the Organisation of Economic Co-operation and Development (OECD), started to keep a systematic account of energy production, trade, and consumption, quantitative evidence suggests that energy demand is very closely following economic growth, measured in terms of gross domestic product (GDP). Based on a calculation later in this chapter using energy and economic data compiled by the OECD for more than 150 countries around the world, we have observed that each percentage change in GDP drives a 0.7% change in energy demand, on average, over the 45 years from 1971 to 2014.

Energy commodities are derived from various primary sources. Electricity is generated from hydro, nuclear, wind, and solar resources. Coal, crude oil, and natural gas are derived from energy mining or exploration/drilling. Biomass (e.g. fuelwood) is harvested from forest resources. Energy resources, thus derived directly from mother nature, are called ‘primary energy’ resources in the energy literature. Not all primary energy resources as such are useful to provide energy services; they require physical or chemical conversion from one form to another before being useful for energy services (e.g. heat, light). The conversion process is called ‘energy transformation’. Generation of electricity from coal, refining of crude oil to produce various products (e.g. gasoline, diesel, kerosene, fuel oil), processing of raw natural gas, and conversion of wood to charcoal are some examples of energy transformation. The energy commodities derived through the transformation process are referred to as ‘secondary energy’ commodities. Electricity and heat could be both primary and secondary, depending on how they are derived. For example, electricity generated by using natural resources directly, such as from hydro, nuclear, solar, and wind, is primary electricity, whereas thermal electricity generated burning fossil fuels or biomass is secondary electricity.

Energy is used in various final demand sectors such as residential, industry, commercial/service, transport, and agriculture. The demand for energy for final consumption is referred to as ‘final energy demand’. It does not account for energy consumption during the transformation process, such as consumption of coal for electricity generation. The difference between the primary energy consumption and final energy consumption is that the former accounts for all consumption of energy including at the transformation stage and at the final consumption stage, whereas the latter does not account for consumption for the transformation purpose. The definition of energy consuming sectors in the energy statistics are different from the economic statistics used in standard national accounts. For example, the household sector in the national accounts covers everything used by the households (e.g. fuel wood for cooking, gasoline for cars, electricity for televisions); the household or residential sector in the energy account does not include energy consumption for transportation. Energy consumption for transportation, no matter who uses the transportation services (household, governments, industry) is included in the transport sector. All energy consumption excluding those for transportation by commercial/service enterprises other than manufacturing, mining, and construction is included in the ‘commercial/service’ sector. Energy consumption in the mining, manufacturing, and construction activities is covered by the ‘industrial sector’. Energy consumption in agricultural, forestry, and fishery activities is sometimes included in a separate ‘agricultural’ sector or in the industrial sector, depending on the convention practiced in a country.

Energy commodities are also used as raw materials in industry. For example, use of natural gas for fertilization production, or the use of petroleum products for production of chemicals and plastics. They are reported in energy statistics as ‘non-energy’ consumption. Energy consumed by international aviation and marine transportation is separately accounted as ‘bunker fuels’ and is excluded from transport sector energy consumption of a particular country.

Within a given sector, energy commodities are used for various purposes. For example, in the residential and commercial/service sectors, they are used for cooking, water heating, home heating, lighting, air conditioning and ventilation, refrigeration, and electrical/electronic devices such as television and computers. These energy services (heating, cooking, lighting, etc.) are referred to as ‘end-use energy services’.

This chapter briefly discusses global energy demand from a historical perspective over the 45 years since 1971, when the IEA started a systematic reporting of energy statistics. This is followed by key drivers of energy demand, particularly in the long run. The chapter also discusses methodologies used and estimates made on future energy demand by well-known institutions, and finally it draws key conclusions.

2 Global energy demand – the historical trends

Global energy demand has increased at an average growth rate of 2% per year over the last 45 years (1970–2014). During this period, the highest annual average growth rate observed during the 1970s (3%) followed by the first decade of the 2000s (2.5%).

Figure 1.1 presents the fuel mix to supply global energy demand over the last 45 years. It is interesting to note that the mix of fuels to meet the primary energy demand has not changed significantly over the time period. In 1971, fossil fuels (coal, oil, and natural gas) accounted for 86% of the global energy demand; this has slightly decreased to 81% by 2014. The share of non-fossil fuels (i.e. biomass and waste, nuclear, hydro, and new and renewables such as solar, wind,

Figure 1.1 Global energy demand by fuel type (Mtoe)

Source: OECD (2017).

and geothermal) in the total primary energy demand has slightly increased from 14% in 1971 to 19% in 2014. It is worth noting that although the importance of new and renewable energy sources (i.e. solar, wind, and geothermal) has increased substantially to address global climate change, their contribution to the global energy supply is still insignificant, at 1% in 2014. This fact indicates the scale of the efforts that are needed to have significant substitution of fossil fuels with new and renewable energy sources.

Oil is one of the largest sources of energy supply, accounting for 32% of the global energy requirement. Its share was much bigger in the past. Until 1980, oil used to contribute more than 40% of the global primary energy demand. Despite the increasing pressure to cut coal use to address climate change, the share of coal in the total primary energy supply is increasing, from 24% in 1973 to 29% in 2014. The share of coal and oil would have been much higher in the absence of increased exploration and better economics of natural gas, whose share has continuously increased over the last 45 years, from 16% in 1971 to 21% in 2014. Natural gas has substituted for oil in industrial applications and coal for power generation.

Among the non-fossil fuel energy resources, the share of hydro and biomass and waste in total primary energy demand remained the same (2% and 10%, respectively) over the last 45 years. The share of nuclear peaked during the 1995–2002 period, with 7% of the global energy supply; however, it has decreased since then and stayed at 5% in 2014.

Figure 1.2 illustrates the evolution of energy demand growth of developed (OECD) and developing (non-OECD) countries. Until the year 2004, OECD countries used to consume more energy than non-OECD countries. However, their share of global energy consumption was continuously deceasing. It decreased from 61% in 1971 to 52% by 1990 and to 38% by 2014. On the other hand, the share of non-OECD countries continuously increased and surpassed the OECD countries in 2005, while non-OECD and OECD countries accounted for 36% and 61%, respectively, of the global energy demand in 1971. The situation has reversed by 2014, with non-OECD countries’ share at 59% and OECD countries’ share at 38%. Rapid economic growth in non-OECD countries driven by industrialization, along with urbanization and motorization, has played the role behind this. Among the non-OECD countries, China alone is responsible for almost 40% of the total non-OECD energy consumption. Other Asia (excluding China) is not far behind, with 22% of the total non-OECD energy consumption. On the other hand, the share of Africa in total non-OECD energy consumption remained almost the same over the last 45 years at around 10%. The same is true for non-OECD America (Latin America and the Caribbean, excluding Mexico which is an OECD member) with 8% to 10% share in the total non-OECD energy consumption during the last 45 years.

In the case of OECD countries, not a significant change in terms of energy consumption was observed over the last 45 years. The share of OECD America in total OECD energy consumption is almost the same (around 50%) over the time period. The share of OECD Europe in total OECD energy slightly decreased from 37% in 1971 to 32% in 2014. The share of other OECD increased due to inclusion of new countries (e.g. South Korea) in the group. It is, however, interesting to note that total energy consumption in OECD peaked in 2007 at 5,555 Mtoe and stabilized since then at a slightly lower level, at around 5,300 Mtoe.

Another interesting fact is that the sectoral mix of final energy demand has not changed over the last 45 years at the global level (see Figure 1.3). For example, the share of the residential sector in total final energy demand was 27% in 1971, whereas it slightly decreased to 25% in 2014. There does not exist any historical pattern (i.e. continuously increasing or decreasing over time) of final energy demand for a given sector; instead it increased in some years and decreased in others. The share of the industrial sector (which includes agriculture and forestry sectors) in the global final energy demand decreased from 39% in 1971 to 35% in 2014; on the other hand, the share of the

Figure 1.2 Global energy demand by economic blocks/geographical region or countries (Mtoe)

Source: OECD (2017).

Figure 1.3 Sectoral energy mix (%)

Source: OECD (2017).

transport sector increased to 31% in 2014 from 25% in 1971. Note, however, that the transport sector share in the global final energy demand has remained flat at around 30% over the last 20 years.

In developed countries (i.e. OECD countries), significant changes have occurred in the sectoral energy mix. Increased motorization, especially during the 1975–1995 period, has substantially substituted energy consumption in the industrial sector with that in the transport sector. While the industry sector share in OEC...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of contributors
• Preface
• Introduction
• PART I Energy and economy
• PART II Energy and environment
• PART III Energy and society
• PART IV Energy and other markets
• PART V Energy modeling
• Index