What Are The Economic Impacts Of Energy?

Energy is a crucial input for all sectors of the economy. It provides power for businesses, transportation, homes, and more. The price and availability of energy influences economic output, jobs, trade, inflation, government budgets, infrastructure, financial markets, and overall economic growth. Energy underpins the production and use of goods and services. It makes modern services possible, such as electricity to run homes and businesses, gasoline for cars and trucks, and natural gas for heating, cooking, and generating electricity. Simply put, economic activity and growth require energy.

In this article, we will examine how energy affects key economic indicators like growth, jobs, and prices. We will analyze the broad economic impacts of energy costs, supply, and investments. The goal is to demonstrate the far-reaching influence of energy on the domestic and global economy.

Energy Prices and Costs

Higher energy prices have significantly impacted consumer spending and business costs. According to a Congressional Budget Office report, “The Economic Effects of Recent Increases in Energy Prices,” the growth of real hourly compensation slowed as a result of rising energy costs, reducing the purchasing power of consumers (https://www.cbo.gov/system/files?file=2018-10/07-21-energy-dist.pdf).

Businesses in energy-intensive industries face much higher production expenses when energy prices are high. Firms may see profits decline if they are unable to pass along cost increases to consumers. Price volatility also creates uncertainty for business planning and investment.

An OECD report found that soaring energy prices have raised concerns about risks to firms’ performance, though it notes that over the long-run, sustained higher prices may spur productivity gains as businesses adapt (https://www.oecd.org/publications/rising-energy-prices-and-productivity-short-run-pain-long-term-gain-2ce493f0-en.htm).

Jobs and Employment

The energy sector is a major source of jobs in the United States. According to the U.S. Energy and Employment Report by the U.S. Department of Energy, in 2021 there were approximately 8.2 million energy sector jobs in the U.S (U.S. Energy & Employment Jobs Report (USEER)). Renewable energy jobs, such as solar, wind, geothermal, and hydropower, accounted for 3.4 million of those jobs. Fossil fuel industries like coal, oil, and natural gas provided around 1.5 million jobs.

The transition to clean energy like renewables and energy efficiency is creating many new jobs. According to the Department of Energy, clean energy jobs grew 4% in 2021, adding over 300,000 net new jobs, while overall U.S. employment grew 3.9% (Clean Energy Job Creation and Growth). Investments in clean energy infrastructure and production can lead to significant job growth in construction, manufacturing, and other sectors.

However, the decline of fossil fuel industries due to the energy transition could also result in job losses in coal mining and oil and gas extraction. Policies that promote job retraining and economic development in impacted communities can help mitigate these effects.

Trade and Exports

The United States has transformed into a net exporter of energy in recent years. According to the U.S. Energy Information Administration, the U.S. became a net total energy exporter in 2019 for the first time since 1952, meaning total energy exports exceeded imports. This was driven by increases in crude oil, natural gas, and natural gas plant liquids (NGPL) exports, as well as declines in energy imports.

The growth in U.S. energy exports has been largely propelled by surges in domestic oil and natural gas production from hydraulic fracturing and horizontal drilling techniques unlocking supplies from shale formations. With abundant new supplies of natural gas and crude oil, the U.S. has sought overseas markets to export the surplus energy.

The economic impacts of increased energy exports for the U.S. include improved trade balances, GDP growth, and jobs associated with energy production and export facilities. However, there are concerns increasing energy exports could raise domestic energy prices as more supply goes overseas. Additionally, the geopolitical implications of expanded U.S. energy exports are complex, as shifts in global energy flows stand to impact energy security and trade relationships.

According to an ICF International study, LNG exports could have a minimal impact on U.S. natural gas prices while generating economic growth: “Impact of LNG Exports on the U.S. Economy: A Brief Update”. However, other analyses indicate natural gas exports could result in declines in GDP as the benefits from exports are outweighed by domestic losses: “Economic and Environmental Impacts of Increased US Natural Gas Exports”.

GDP and Economic Growth

Energy is a major component of the global economy and a key driver of economic growth. The share of energy in global GDP has declined in recent decades as economies have become more energy efficient. However, energy still accounts for around 5-6% of global GDP according to the International Energy Agency. The energy intensity of the world economy, measured as total energy consumption per unit of GDP, fell by 1.2% in 2022.

Disruptions to energy supply can have significant impacts on economic output and growth. Countries that rely heavily on imported energy are vulnerable to price shocks that can reduce GDP. For example, a 10% increase in oil prices is estimated to reduce GDP by around 0.2% in oil-importing regions like Europe, according to World Bank research. Periods of high energy prices driven by geopolitical events or supply constraints tend to be associated with lower GDP growth globally. Investments to improve energy efficiency and expand domestic energy production can reduce vulnerability to external shocks and support stronger long-term economic growth.

Inflation

Energy prices have a significant impact on inflation. When energy costs rise, it drives up production costs for businesses, which leads to broader price increases as companies pass on higher costs to consumers (Consumer Price Index Summary – 2023 M12 Results). The energy index itself is a major component of the overall inflation rate. For example, in 2021 the surge in US inflation was driven in large part by higher oil and natural gas prices (The inflationary impact of energy prices).

Rising energy prices also have an indirect effect on inflation by increasing transportation costs. This filters through supply chains, raising prices for a wide range of consumer goods. Food prices in particular tend to spike when energy costs go up, due to higher expenses for production, packaging, and transport.

Central banks typically respond to energy-driven inflation through monetary policy actions. As inflation heats up, central banks will often raise interest rates to tighten money supply and dampen demand. However, the efficacy of rate hikes is limited when inflation is primarily driven by external supply factors like energy prices. Tighter monetary policy also risks slowing economic growth. Central banks must balance these tradeoffs carefully when energy spikes lead to inflationary pressure (The inflationary impact of energy prices).

Government Revenues

Energy production generates significant tax and royalty revenues for governments. According to a study by the German Federal Institute for Geosciences and Natural Resources, taxes and royalties from fossil fuel production accounted for around 6% of global government revenue in 2018. The study found that revenues are highly dependent on production volumes and energy prices.

Countries with abundant domestic energy reserves tend to rely more heavily on energy taxes. For example, in the UK, taxes on the production and consumption of oil, gas and coal generated over £40 billion in 2021, representing 5% of total tax revenues. As countries transition away from fossil fuels, revenues may decline unless new energy taxes are implemented.

Governments must weigh declining revenues from fossil fuel production against the benefits of reduced climate impacts and cleaner energy. Energy transitions create budgetary challenges, but can be managed through phased policies and new revenue sources. Strategic planning allows governments to shift budgets smoothly and mitigate losses over time.

Infrastructure Investment

Energy infrastructure investment, such as capital spending on power plants, electricity grids, pipelines, and other energy systems, has significant economic impacts. Large-scale infrastructure projects create jobs and stimulate growth across multiple industries like construction, manufacturing, and engineering.

For example, the Infrastructure Investment and Jobs Act passed in 2021 allocates over $100 billion for energy and power infrastructure in the United States, which is expected to create hundreds of thousands of jobs and accelerate the transition to clean energy (Infrastructure Investment and Jobs Act). Studies show that energy infrastructure investment varies widely across regions but is highly correlated with economic growth and efficiency (Kuang, 2023).

In addition to direct job creation in the energy sector, infrastructure investment has spillover effects into manufacturing, transportation, IT, and other industries that support large capital projects. Strategic infrastructure spending can also unlock new energy sources, expand access to electricity, improve reliability, and lower energy costs for homes and businesses.

Financial Markets

Energy companies and commodity prices significantly influence financial markets. Major energy corporations like ExxonMobil, Chevron, BP, and Shell are major components of stock indexes like the S&P 500.

Rising or falling oil and gas prices directly impact the revenues and profits of energy companies. This leads to fluctuations in their stock prices and broader effects on index performance (UNEP, https://www.unep.org/sites/default/files/ch5.pdf). For example, during the oil price collapse of 2014-2016, energy stocks saw major declines.

Beyond stocks, commodity trading and risk management are central activities in energy finance. Banks and hedge funds actively trade oil, natural gas, and other energy commodities. Energy companies use financial instruments like futures, options, and swaps to hedge risks related to commodity price volatility (McCombs School of Business, https://www.mccombs.utexas.edu/execed/for-individuals/classes/energy/energy-finance/).

Overall, energy is a major factor in financial markets worldwide. Energy corporations and commodity prices have substantial impacts on stocks, indexes, trading, and risk management activities.

Conclusion

In summary, energy has wide-ranging economic impacts across many sectors. Key economic impacts include energy prices and costs, jobs and employment, trade and exports, GDP and economic growth, inflation, government revenues, infrastructure investment, and financial markets.

The outlook for the future points to continued change and transition in the energy sector. As the shift to cleaner renewable energy accelerates, there will likely be both challenges and opportunities. Global energy demand is projected to grow significantly in the coming decades. This will require substantial investment and infrastructure development. The transition to low carbon energy can also spur innovation, job creation, and new economic activity if managed effectively. However, it remains vitally important that energy is affordable and accessible for all. Governments, businesses, and society will need to work together to ensure the economic benefits of the energy transition are shared broadly.