What is Economics?
Economics is the study of allocation of scarce resources.
Resources yield benefits through their use in consumption or production. And resources are scarce when making use of them in one way removes the opportunity to make use of them in another.
For example, we use our time for play or work. And the organizations where we work ask us to perform different tasks in order to fulfill their objectives. A corporation’s primary objective is to earn profits for its owners by creating a product valued by their customers. Advocacy groups may have some objective other than profitability. But in a way similar to corporations, they serve their objective by providing a service valued by their constituents. These organizations receive payments--revenues or donations--that they use to invest in equipment and to pay workers. And workers use the income derived from work to buy a house, or heat a house, or buy a car, or put gasoline in the tank. And then we decide where to go, to play or to work.
All of these decisions require tradeoffs. How much equipment will an organization forgo in order to hire another worker? How much income will we forego in order to play? How much heat will we forgo in order to travel? Economics provides a framework for thinking about these choices.
Economics and Energy
Worldwide demand for energy is growing rapidly. In the International Energy Outlook 2017 (the most recent full version available as of August 2018), the U.S. Energy Information Administration (EIA) projects that, in 2040, world marketed energy consumption will have increased by 28% from 2015 levels. See Figure 1.1. Most of this increase will occur in non-OECD countries. Remember (from previous courses) who they are? See the Organisation for Economic Co-operation and Development (OECD).
This energy is going to come from a wide and changing mix of fuel types, see Figure 1.2. In general economic terms, Figure 1.1 is the demand forecast and Figure 1.2 is the supply forecast.
Finally, to provide some important perspective, keep in mind that there is an important difference between total energy use and per capita (per person) energy use. The chart at the bottom of the page demonstrates this, especially when compared to Figure 1.1.
Firgure 1.1: World energy consumption, 1990-2040 (2015 reference)
Click for a text description of quantities from Figure 1.1 (post-2000 data from EIA data viewer
This is a bar chart that shows the world energy consumption in quadrillion Btus from OECD and Non-OECD countries. The content is detailed in a table below.
World energy consumption, 1990 -2040
||OECD energy consumption
||Non-OECD energy consumption
Figure 1.2: World energy consumption by fuel type, 1990 - 2040
Click Here for a text description of Figure 1.2
This is a series of line graphs with the date in years across on the x axis and quadrillion (quads) on the y axis. Numbers are approximate.
- Nuclear stayed around 25 quads from 1990 - 2020 then a steady increase to about 45 quads in 2040.
- Renewables went from around 40 quads in 1990 to about 55 in 2010, then uptick until reaching about 75 quads in 2015. It is projected to rise steadily to about 125 quads in 2040.
- Natural Gas. Started at around 75 quads in 1990, rose steadily to 110 in 2008, dropped to about 105 quads in 2009, rose to about 125 quads in 2015 and is now projected to increase to 190 quads by 2040.
- Coal: Started at 90 quads in 1990, stayed steady until about 2002 and then rose to about 150 quads in 2015. It is expected to level off at around 155 quads in 2020 and stay at that level through 2040.
- Petroleum and other liquids: Started at about 140 quads in 1990 and increased to about 190 quads in 2015. Liquids are projected to increase to about 225 quads by 2040.
Figure 1.3: Per capita energy use of countries and groups analyzed in this course, 1980 - 2015. (Data through 2015 are currently available.) Click here for a version that can be resized.
Click Here for a text description of Figure 1.3
This is a line chart that has seven lines with the date in years across on the x-axis (19800 through 2015) and million Btu’s per person on the y-axis. The lines on the chart represent the per capita energy consumption of the following geographic areas: the world, OECD nations, non-OECD nations, the EU-27, the United States, China, and India. Numbers below are approximate.
- The U.S. has maintained an emission rate of between 300 and 350 million btu's per person since 1980, with a drop from around 340 in 2008 to around 290 in 2015.
- OECD nations maintained an emission rate of approximately 200 million btu's per person since 1980, with a slight downward trend since 2008.
- The European Union has maintained an emission rate of approximately 150 million btu's per person since 1980, with a slight downward trend since 2008.
- World averages have maintained a relatively steady 60 million btu's per person since 1980.
- Non-OECD nations averaged approximately 25 million btu's per person from 1980 through 2002, then slowly increased to approximately 50 million btu's per person in 2015
- China slowly increased from around 20 million btu's per person in 1980 to about 40 million btu's per person in 2002, then had a sharp increase to approximately 90 million btu's per person in 2015. This is by far the most dramatic increase over a short period of time in this chart
- India has increased at a very gradual rate from approximately 5 million btu's per person in 1980 to around 25 million btu's per person in 2015.
In the wild scramble to meet soaring demand with limited resources (ah ha, “scarce resources”!), the situation is made far more complicated by volatile external issues such as those involving the environment (from emissions and climate change to land use and biodiversity), security (energy independence) and local health and economies. Issues such as these, which are addressed outside of normal market transactions ("external to the market"), are called externalities or nonmarket factors and are the subject of this course.