Josh Dippenaar

Energy-Economy Nexus

In general, mainstream economists neglect the idea that high energy prices can cause economic decline or stagnation. It is frequently argued that energy costs are small compared to other expenditures that make up GDP (e.g. consumer spending, which makes up about 70%), which makes them insignificant (Aucott & Hall, 2014; Heun et al., 2017). This view ignores the importance of energy as a multiplier of economic growth and development (Yeager et al., 2012). Simply comparing the percentage accounted for by energy expenditures with other expenditures ignores the multiplier effect of energy and the effects of energy prices on the costs of production and hence products and services in the economy. If the price of energy increases, almost everything costs more, and this ripples through the economy.

Mainstream economic thinking has not identified energy as a primary factor of production (Aucott & Hall, 2014; Heun et al., 2017; Stern, 2011). Resource economists have developed models that incorporate the role of energy in the growth process, but these ideas remain isolated in the resource economics field (Stern, 2011). Ozturk (2009) conducted a survey on recent progress in the literature of the nexus and causality between energy consumption-economic growth, and electricity consumption-economic growth. This study revealed a lack of consensus on the existence and direction causality between energy consumption and economic growth. These conflicting results may arise due to different data sets, countries’ characteristics, variables used and different econometric methodologies have been used.

However, an important conclusion on the relationship between electricity consumption and economic growth for the country-specific studies were drawn; which is that the causality is from electricity consumption to economic growth. Consequently, it is found that electricity is a limiting factor to economic growth and, hence, reductions in electricity supply will have a negative impact on economic growth (Ozturk, 2009).

Aucott, M., & Hall, C. (2014). Does a change in price of fuel affect GDP growth? An examination of the U.S. data from 1950-2013. Energies, 7(10), 6558–6570.
Heun, M. K., Sakai, M., Santos, J., Brockway, P. E., Pruim, R., & Domingos, T. (2017). From Theory to Econometrics to Energy Policy : Cautionary Tales for Policymaking Using Aggregate PrHeun, Matthew K.oduction Functions. Energies.
Ozturk, I. (2009). A literature survey on energy-growth nexus. Energy Policy, 38(1), 340–349.
Stern, D. I. (2011). The role of energy in economic growth. Annals of the New York Academy of Sciences, 1219(1), 26–51.
Yeager, K., Dayo, F., Fisher, B., Fouquet, R., Gilau, A., & Rogner, H.-H. (2012). Energy and Economy. Global Energy Assessment - Toward a Sustainable Future, 385–422.