🔋A Better World
🔋A Better World
How energy relates to your standard of living.
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Over the long arc of history, things tend to improve over time. Generally speaking, it is human nature to innovate better technology, make life easier, and strive to make better lives for the next generation. In most advanced economies, the ability to travel the world, instantly communicate with anyone, reliable power and electricity, cheap food and refrigeration, and abundant avenues for leisure can often be taken for granted.
The United Nations has developed a method of ranking the standard of living of different countries using the Human Development Index (HDI). The three main components include health, education, and economic activity.
While the UN has this fancy metric, it is common to use gross domestic product aka GDP as a proxy for a country’s well-being.
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.
Gross domestic income (GDI) is merely the money earned on those goods and should be theoretically equivalent to GDP. GDP per capita is then just GDP/population to standardize to each citizen. We can confidently use this proxy for the well-being of a nation because GDP per capita is directly correlated to the HDI.
The final connection I will make in this article is the energy use per person to GDP per capita. Again, there is a very strong correlation between the standard of living and energy use per person. The more energy people can use, the higher their standard of living is. It is debated to what extent energy is the cause of the higher standard of living, but it is certainly important. Energy is fundamental to the revolution in industrial production, manufacturing, and agriculture which frees up time for other developments. You can see that some countries can improve energy efficiency and achieve high GDP per capita with lower energy use, but there are fundamental constraints.
While I could’ve summarized in one sentence that energy is vital for prosperity, it is sometimes useful to observe these tight correlations between energy, the economy, and the standard of living and think about why they may be there. Energy is not explicitly encompassed in GDP except for the expenses required to produce goods and services.
Many countries have grown accustomed to abundant and cheap energy which has allowed prosperity in other areas like software and technology for example which dwarf the market cap of the energy-producing companies. When it comes down to brass tacks though, energy holds more real-world weight. Without reliable and cheap energy, industry, digital infrastructure, and household electricity wouldn’t be possible. At the very least it would become a big concern if it becomes more expensive or less reliable.
I have been documenting Germany’s industrial decline with some of their questionable energy decisions such as shutting down nuclear power plants in favor of coal and renewables (not to mention the negative climate impacts). It goes to show the vulnerability of GDP and the economy to energy security.
Countries that produce energy are then at strategic importance and countries that rely on imports are at strategic vulnerability. A recent example is the Nord Stream pipeline that supplies Russian oil and gas to Europe which was sabotaged and no longer operational. Ironically, this could have been used as a strategic lever for Russia before it was no longer an option.
The top energy production sources are oil, coal, and natural gas which will be of most strategic importance. Behind that are biomass, hydro, and nuclear. The top exporters of these key commodities are,
Oil: Saudi Arabia, Russia, Iraq, and the United States
Coal: Indonesia, Australia, and Russia
Natural gas: US, Australia, and Qatar
Uranium: Kazakhstan, Canada, and France
Biomass: US, Canada, and Latvia
Renewables: China dominates the production of wind, solar, and batteries currently.
In contrast, the top importers of these commodities are,
Oil: EU, China, and the US
Coal: China, India, and Japan
Natural gas: Germany, Japan, and China
Uranium: France, US, and China
As you can see, some countries sit strategically in an important place on the geopolitical sphere resource-wise. These include Russia, the United States, and Australia to list a few. If nuclear or renewables increase significantly then China and Kazakhstan could gain importance. On the flip side, there are some countries/regions that face serious risks if energy supplies are questioned like Europe, Japan, and China.
The standard of living has been increasing for a long time with little regard for energy security. Lately, there has been more concern over energy security with geopolitical conflicts increasing in recent years. Energy prices associated with the Russian/Ukraine war have caused massive dislocations in the oil and natural gas markets with high prices in Europe as a consequence. I’ve highlighted the countries that remain at extended risk for issues in the future and those that may rise in prominence with any energy issues.
If we want greater prosperity, our goal should be in better energy use - whether in the form of more use, cheaper, more energy dense, more efficient, etc. Not only is energy not explicit in GDP, but it is misunderstood as ultimately being upstream to human prosperity, the economy, and the standard of living. The hope for a better future rests in the hands of those producing cheap and reliable energy. Until next week,
-Grayson
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