Globalization and Energy

A recent article on the Fed Chairman's view of globalization in the Washington Post got me thinking about the relationship between globalization and energy. There's been a lot of anti-globalization rhetoric over the last decade or so, but I haven't heard much relating to energy. In its current phase, the expansion of globalization is in lock step with expanded use of energy. Some of this can be attributed to the connection between economic growth and energy demand in general, but when we look at the replacement of domestic manufacturing by imports, or the offshoring of jobs--two aspects of globalization that have come in for criticism in the US--the energy consequences fall into a different category. Since globalization appears unstoppable, we have a vested interest in making it more energy-neutral, in order to avoid turning the present market-based resource competition into something more dangerous--or simply running into a wall of resource limits.

Globalization comes in many flavors, including both economic and social elements. I'm not sure of the energy implications of the latter, unless they are to be found in the backlash it spawns. One could argue that al Qaeda's fight isn't with the US, per se, but with the tidal wave of Western culture that could swamp fundamentalist Islam in a generation or two. I'll leave that mare's nest for others to unravel. In any case, the connections between economic globalization and energy are much clearer.

Consider China's rapidly growing export economy. Much has been written about the environmental consequences of shifting manufacturing from the US to China, where rules are more lax. The energy impact of this shift is also significant, because China's consumption of energy per unit of GDP is a multiple of that in Western Europe or North America, and will remain so even after planned efficiency improvements. In 2004 the US economy was four times more energy efficient than China's, when compared on the market-exchange-rate basis appropriate for trade. Even after allowing for differences in the two countries' economic mixes, manufacturing an item in China requires, on average, more energy than if it were made here, including the energy used in shipping it. That also has implications for the greenhouse gas emissions associated with manufacturing.

The energy impact of offshoring is more subtle, but may be nearly as important as the trade-based example above, because of the relative size of the service sector. A service job displaced from the US to India, for instance, almost certainly represents a net increase in global energy consumption. The US worker whose job is moved offshore doesn't stop using energy, even if he becomes permanently unemployed or retires as a result of the change. And the beneficiary of the transfer offshore will use more energy, as the accompanying increase in income translates into a standard of living that affords more consumer goods, and possibly a move to less dense housing. This needs to be quantified more rigorously than I've done here, but it looks like offshoring increases global demand for electricity, and possibly for transportation fuels.

If these two examples are representative, then further globalization will expand global energy demand and increase emissions of greenhouse gases more than would otherwise be the case. For all the benefits of globalization in moving people out of poverty, these side-effects are serious and, if left unchecked, will impose limits on the ultimate extent of globalization's spread. Addressing this will require great creativity and may result in some counter-intuitive solutions, such as subsidized technology transfer. The impact of this issue on energy security may be less direct than tackling vehicle fuel consumption, but in the current, largely demand-driven oil market, it offers a lever we shouldn't ignore.