Energy Prices and Conservation

Measured by the rising volume of oil imports and declining domestic production of oil and gas, U.S. postembargo trends are not encouraging. On the energy demand front, however, it would be incorrect to conclude that the upheavals of 1973-74, perhaps in reinforcement of other trends, have had no discernible effect. Energy consumption has, of course, risen in absolute terms, but not as fast as GNP. Total U.S. energy consumption is estimated to have risen by somewhat under 5 percent from 1973 to 1977, GNP by 8 percent. In other words, this four-year period has helped sustain a continuation of the steady decline in the ratio of energy to GNP dating from the early 1970s, in contrast to the pronounced rise in the late 1960s. Recent trends span too short a time for conclusive analysis and a sorting out of the under-lying factors at work. But there is some circumstantial evidence that U.S. use of energy is becoming gradually more efficient:

• Automotive fuel economy is clearly on the rise. The 1977 models showed a 30 percent increase in mileage per gallon over 1974 cars. The trend is likely to persist with the current model year
• Significant proportions of owner-occupied homes have had their insulation upgraded. Shortages of insulating material are being reported around the country even before the rewards of homeowner tax credits have become law. Energy-saving heat pumps are becoming economically attractive for heating and cooling new homes in a number of regions.
• Unit energy consumption in industry has been moving downward, reflecting improvements in energy utilization in a number of industrial sectors—for instance, chemicals and paper. (A ratio relating overall industrial energy use to the Federal Reserve industrial production index has dropped 8 percent since 1973.) It is, however, commonly recognized that much of this improvement stemmed from tougher "housekeeping" and managerial practices (such as plugging steam leaks, insulating pipes, and so on). Major gains in efficiency may come only from new investments, which, in the current economic climate, are scarcely proceeding at a rapid clip.

If what has happened in recent years does indeed signify some kind of conservation momentum, it is worth noting that it occurred in the absence of specific governmental policy measures except for the mandated 1985 fuel economy standards and interim standards in effect only beginning with the current model year.

What, then, is the explanation? There were dramatic energy price increases from 1973 to 1974: in "real" terms (that is, deflated by the increase in the consumer price index), gasoline prices rose 22 percent and heating oil by 44 percent. Residential gas prices rose sharply after 1974, while electricity prices have risen moderately throughout the period. One can conjecture about what additional stimulus toward conservation might have ensued from sustained price pressures. In fact, real gasoline prices have actually dropped slightly since 1974 and heating oil prices have risen just a bit. One can also visualize an added conservation response if prevailing energy prices were to begin moving upward to reflect the true replacement cost of what is consumed.

International trends. The perception that the Western industrial nations must shoulder a conservation burden—either in the hope of diluting OPEC bargaining power or of stretching out a dwindling global resource—has focused attention on the comparative performance of different economies. The International Energy Agency periodically evaluates the country-by-country record of policy initiatives and trends in the ratio of energy use to national output. Unfortunately, there is no clear-cut way of judging comparative national effort, success, and failure. Countries have different regulatory and political traditions and start from varying patterns of energy use.

For example, Sweden—alone among a group of nine highly advanced countries—has recorded a faster growth in consumption than in national output between 1973 and 1976. Yet, as is well known, the ratio of Sweden's energy consumption to its level of output per capita remains significantly below that of the United States—largely because much higher energy prices encourage conserving practices in home heating, transport, and industrial processes. For what it is worth, if a declining energy/output ratio is a decent short-term proxy for a successful conservation effort (whether voluntarily undertaken or triggered by police measures), then the United States seems to stand a bit "better" than halfway among the nine important industrial countries. That is, three of these countries experienced even greater declines in the energy/output ratio: the rest, lesser declines, or (in the case of Sweden) an increase.

Comparisons of different levels of energy use among countries (as distinguished from comparative short-term trends) lead to more formidable problems of interpretation, even though these have also been resorted to "keep score." For example, President Carter stated in a speech to the American People on April 18, 1977: "Ours is the most wasteful nation on earth. . . . With about the same standard of living, we use twice as much energy per person as do other countries like Germany, Japan, and Sweden."

The president's words suggest that by following the example set by other countries Americans can maintain their accustomed level of comfort while reducing their use of energy. A recently completed study, conducted at Resources for the Future, suggests that this expectation may be unrealistic. The study starts from the position that much more needs to be known about the characteristics of energy use in different economic environments before lessons for the United States become clear (see How Industrial Societies Use Energy: A Comparative Analysis, by Joel Darmstadter, Joy Dunkerley, and Jack Alterman, Johns Hopkins University Press for Resources for the Future, 1977).

For example, to what extent do differences in energy use arise from factors—such as differences in industrial specialization or geography—that are not easily changed? How much stems from differences in the effectiveness with which given energy-using activities are conducted?

It seems that about 40 percent of the difference between the high U.S. ratio of energy use to output and the lower foreign ratios is due to the first of these factors—that is, to the production of goods that require a great deal of energy and to movement of people and goods over great distances; 60 percent arises from energy efficiency differences, which, incidentally, need not reflect differences in economic efficiency. That is, less intensive energy use need not mean lower overall costs. The influence of price and of government policies must be taken into account. Thus, high foreign taxes on automotive fuels and use clearly help explain the much greater foreign concern with fuel economy than has historically prevailed here. Similarly, cheap natural gas has made it more economical for U.S. industry to use more energy in place of labor and capital.

The study recognizes that rising energy prices can induce conservation—both by encouraging more efficient utilization of existing energy-using facilities and by designing future facilities with an awareness of the new energy realities.