EMF OP 17: The Response of Energy Demand to Higher Prices: What Have We Learned?

Abstract: 

In the decades prior to 1973, demand for energy, particularly energy liquids and electricity, expanded exponentially. From 1950 to 1973, U.S. aggregate energy use grew by 3.5% per year, roughly matching real GNP growth (3.7%). Demand shifted toward petroleum (4.3% annual growth) and electricity (7.7%) and away from coal (1.0% annual growth). These trends, reflected throughout the world, were encouraged by flat or gradually declining energy prices. Since 1973 energy price increases have been pervasive, although increases have differed radically among energy carriers and over time, being largest since 1979. From 1973 to 1982, real gasoline prices to consumers have increased 51%, natural gas delivered to households 139%, and residential electricity average price only 23%. Fuel prices delivered to electric utilities have varied more: oil increased 175%, natural gas 350%, while coal price increased but 85%.Energy demand adjustments have been profound. Between 1973 and 1982, U.S. consumption of oil and gas have both declined, oil averaging a 1.4% annual decline, and natural gas 2.3%. Electricity growth has been reduced to 2.1% per year. Of the fossil fuels, only coal demand has been encouraged, rising at an annual rate of 2.6%. U.S. primary energy use declined at an annual rate of 0.6%. And measured after subtracting electric utility conversion losses (secondary energy), use declined 1.3% annually since 1973. Non-communist world oil consumption declined from 48 million barrels per day (mmb/d) in 1973 to 46 mmb/d in 1982, and primary energy consumption has fallen annually since 1979. On the other hand, coal consumption increased an average of 2.3% per year. While demand reductions have been unsteady, occurring primarily since 1979, the old growth patterns have been radically altered. Thus following large increases in energy prices, demands have shifted toward coal, the fuel experiencing the smallest price increase, and away from oil and gas, fuels experiencing the greatest increases. Overall energy demand growth has been severely curtailed. A natural experiment was created allowing examination of sensitivity of energy consumption to prices. However, there have been government and utility sponsored conservation programs, information campaigns, tax incentives, and moral suasion. Since 1973, U.S. economic growth has diminished, with average real GNP growth only 1.8% per year. We are just recovering from a recession involving low capacity utilization. Thus, although we have accumulated a vast body of evidence, that evidence is subject to a variety of interpretations. My goal is to communicate key conclusions learned partially through the natural experiment and partially through information available prior to 1973. The exposition progress from very general conclusions about the nature of energy demand toward more specific quantification of energy demand elasticities. Reprinted in 1983 from The American Economic Review, Vol 74, No 2, May 1984, pp 31-37.