EME 444
Global Energy Enterprise

Introduction to Nonmarket Analysis

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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. For example, a corporation’s 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 2016, the U.S. Energy Information Administration (EIA) projects that, in 2040, world marketed energy consumption will have increased by 48% from 2012 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 1-5. In general economic terms, Figure 1-1 is the demand forecast and Figure 1-5 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.

Graph showing Non-OECD vs OECD energy consumption from 1990 to 2040. See link in caption for details.

World energy comsumption, 1990-2040
(text version)
Credit: International Energy Outlook 2016. U.S. Energy Information Administration.
Graph showing world-marketed energy use by fuel type from 1990 to 2040. See link in caption for details.
World energy consumption by fuel type, 1990 - 2040
(text version)
Credit: International Energy Outlook 2016. U.S. Energy Information Administration.
Graph showing per capita energy use from 1980 through 2011 of the U.S., the EU, the world, OECD nations, non-OECD nations, India, and China
Per capita energy use of countries and groups analyzed in this course, 1980 - 2011. (Data through 2011 are currently available.)
Click here for a version that can be resized. Click here for a text version.
Credit: Copyright ©2015 Dan Kasper.  Data source: International Energy Statistics chart builder.

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.