Perverse Accounting: Phantom Efficiencies in Energy Per Unit of GDP

From Gregor McDonald: 

The US economy is consuming 2.00% less energy than its five year average seen prior to the 2008 financial crisis. Some will be cheered by this data, and indeed there are small nuggets of good news here. First, US consumption of oil—which turned flattish after the 2004 repricing—is down significantly, by over 10% since 2007. Also, as America turns increasingly to the power grid, consuming more natural gas and coal, the addition of renewable power from solar and wind is growing strongly. Eventually, these nascent trends will convert to larger structural changes. So let there be no doubt that energy transition is underway in the United States.

The problem remains, however, that in order to carry debt loads both public and private the US is still very dependent on strong industrial growth to generate revenues, and support wages. . .

Now, there is a popular myth that has grown up in the past two decades [that] the US economy already transformed itself. This received wisdom holds that GDP rose while energy consumption per unit of GDP fell. That is certainly true in the narrow sense. But, not true in the broader sense. Here’s why: US domestic energy consumption which at one time was devoted to industrial production here in the US, is now simply offshored to Asia. The US economy still demands large units of energy which we simply import through manufactured goods. Worse, US GDP accounting still overweights consumption. This makes for a perverse, energy-accounting outcome: the more we offshore energy-consuming manufacturing to other countries, the more distorted our energy efficiency claims become, against GDP.

The notion that the US economy therefore is much less sensitive to energy shocks is also, therefore, a myth. We simply take the shock globally now, instead of acutely through our domestic manufacturing base (or what’s left of it.). Now that China has certainly passed through its first Lewis Turning Point, the Asian giant’s ability to combine cheap labor with cheap energy to produce its beloved and ruthlessly competitive manufacturing arbitrage is going to dissipate. . . .