Monday, June 21, 2004

I suspect that some of my colleagues have gotten the idea that I don't place much importance on energy conservation. Although many speak of conservation as a source of energy--and a cheap one at that--I think that designation muddles the already confused distinction between supply and demand. Conservation lives in the world of consumer behavior and industrial demand, while true sources depend on technology, geology, and other engineering disciplines.

The New York Times presented a somewhat pessimistic view of conservation in this Sunday's Week in Review section, in an article entitled, "Suddenly, It's Hip To Conserve Energy." While acknowledging the contribution of energy-saving appliances and other legacies from our last energy crisis, the author suggests that as soon as prices fall again, the shine will go off hybrid cars and other new means of saving energy.

That may be true, but I think it gives too little credit to the lasting impact of such advances. If you think of conservation as occurring in cycles, with successive waves of energy-saving investment following each sustained spike in energy price, and then falling back to lower levels as prices revert to normal, the base efficiency of the economy will still improve dramatically over time.

For example, a Toyota Prius purchased today will continue to save gas for ten or more years, even if the original owner trades it in the moment prices fall below $2.00/gallon. In the same way, a new energy efficient boiler or HVAC plant at an industrial facility will save energy for decades, long after the economic drivers behind the project have disappeared. This legacy effect, along with the growth of the service and knowledge sectors of the economy, is one of the main reasons we use much less energy per dollar of GDP today than in the 1970s.

I also believe the article also focuses too much on oil, and the likelihood that its price will fall in the near future, returning us to the height of the fad for large SUVs. A higher proportion of energy conservation in the US will probably be driven by the high price of natural gas, which is unlikely to drop anytime soon, as I've discussed in previous postings. High natural gas prices will provide strong incentives for conservation for many years, so we should expect those graphs of BTUs/dollar of GDP to continue their downward slope, with attendant benefits for greenhouse gas emissions and our balance of trade.

Rather than seeing conservation as unimportant, I think it's a vital component of the long-term energy picture, but one that is essentially a foregone conclusion while energy prices remain volatile and "cheap and reliable energy" becomes a contradiction in terms, due to geopolitical disruptions and inadequate investment in new infrastructure.

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