Energy for Economic Growth

Global Recession And Financial Crisis...

As the world struggles to emerge from a global recession and financial crisis, countries are looking for solutions to improve domestic economic performance and put people back to work. Global energy demand and prices have been resilient during the recession, leading policy-makers in countries with the potential to produce energy to look to that sector as a potential engine for economic growth. The energy sector constitutes a relatively modest share of GDP in most countries, except for those in which oil and gas income loom large. However, the energy sector’s impact on the economy is greater than the sum of its parts. Most importantly, energy is an input to nearly every good and service in the economy. For this reason, stable and reasonable energy prices are beneficial to reigniting, sustaining and expanding economic growth. Its broad supplier networks and resultant multiplier effect also drive the energy sector’s influence on economic growth. The industry’s well-paid, skilled workforce and high capital spending flow through the economy, creating jobs and spurring growth in seemingly unrelated sectors.

At the same time, the ability of a country to capitalize on supplier networks and the multiplier effect depends on the capacities of the local labour and industrial markets. Many resource-rich countries strive to maximize the economic benefits of their resource endowments by encouraging the growth of related industries. For all of these reasons, the energy sector can make an important contribution to the recovery from the global downturn. For example, the oil and gas industry in the United States is an important bright spot in an economy still struggling to find its footing. Likewise, renewable energy innovations in the power sector have contributed to employment gains, although the multipliers in that sector are highly sensitive to the nature of domestic supplier networks. However, balancing energy prices, energy security and the environment requires trade-offs between job creation and overall productivity in the energy sector.

Although the record of managing natural resource wealth to promote economic development is mixed, several countries have done so with great success. Areas with fewer natural resources are also focusing on the energy sector as a potential driver of economic growth. Steady and reliable energy supplies are crucial to growth in developing and emerging economies. South Korea, China and India are fostering entrepreneurship and technological innovation in non-traditional energy sectors as another avenue to promote the development of their rapidly growing economies. Specifically, they are providing incentives for wind and solar production, encouraging joint ventures and technology transfers and providing research and development (R&D) spending to encourage these efforts. Many developed economies are also seeking to expand their renewable energy capacity to be at the forefront of this growing sector and to achieve sustainability goals.

Energy can undoubtedly be a driver of economic growth, but how can governments enact policies that encourage it? Governments generally focus on prices, security of supply and environmental protection when considering energy policy. The added goals of job creation and economic growth can be challenging. Maximizing direct employment in the energy sector may not be the right goal if it increases energy prices and decreases the industry’s overall productivity. Instead, focusing on how energy decisions contribute to the overall economy, not just the industry’s direct economic contribution, is more likely to maximize welfare. The industry contributes to economic growth and job creation, in some countries to a very great extent. But in most countries, its position as the lifeblood of the modern economy dwarfs the direct effects.

A crucial input to nearly all of the goods and services of the modern world. Stable, reasonably priced energy supplies are central to maintaining and improving the living standards of billions of people. The global recession and financial crisis that began in 2008 bring a new focus to decisions about energy. Many parts of the developed world still face sluggish economic growth and risks from financial crises. Reduced economic activity has led to stubbornly high levels of unemployment in many countries. And as private and consumer earnings have declined, those nations are facing shrinking tax bases, compounding issues with sovereign debt. The impact is felt around the world, including in what have been the more vibrant emerging markets. Despite the economic turmoil, energy demand has been resilient throughout the recession, driven primarily by rapidly growing consumption in the developing world. The energy industry is undoubtedly an engine of growth, as its products serve as inputs into nearly every good and service imaginable. But how does the energy industry contribute to economic growth and employment, apart from its vital products? Given the risks and challenges in the overall global economy how can the energy industry play a role in economic recovery and job creation?

The Role of the Energy Sector in the Economy...

The energy industry contributes to economic growth in two ways.

First, energy is an important sector of the economy that creates jobs and value by extracting, transforming and distributing energy goods and services throughout the economy. As an example, in 2009 the energy industry accounted for about 4% of GDP in the United States. In some countries that are heavily dependent on energy exports the share is even higher: 30% in Nigeria, 35% in Venezuela and 57% in Kuwait. The energy industry extends its reach into economies as an investor, employer and purchaser of goods and services.

Second, energy underpins the rest of the economy. Energy is an input for nearly all goods and services. In many countries, the flow of energy is usually taken for granted. But price shocks and supply interruptions can shake whole economies. For countries that face chronic electricity shortages like India, continuing disruptions take a heavy, ongoing toll. The industry directly affects the economy by using labour and capital to produce energy. This role is particularly important when economic growth and job creation are such high priorities around the world.

The energy sector directly employs fewer people than might be expected given its share of GDP, especially when compared to other industries. In Norway, energy-related industries account for 20% of business sector GDP but just 2.3% of business sector employment. Norway’s wealth may be in oil, but that wealth supports other sectors, especially service industries. More than eight times as many Norwegians work in healthcare as in energy extraction. Nonetheless, recent research in the United States demonstrates that the energy industry supports many more jobs than it generates directly, owing to its long supply chains and spending by employees and suppliers. Energy-related industries do not have a large need for labour, but the workers they hire are relatively highly skilled and highly paid. For example, compensation per worker in energy-related industries is about twice the average in Germany, Norway, the United Kingdom and the United States and four times the average in Mexico and South Korea. As a result of their high salaries, employees of the energy industry contribute more absolute spending per capita to the economy than the average worker. High wages in the sector reflect the fact that energy industry workers are much more productive than average, contributing a larger share of GDP per worker than most other workers in the economy.

The energy industry is one of the most capital-consuming industries in the world. In its 2011 World Energy Outlook, the International Energy Agency (IEA) estimated that a cumulative global energy investment of US$ 38 trillion (in constant 2010 dollars) will be required by 2035 to meet the world’s growing energy demand. Investment requirements per worker in the energy industry are also very high. As an example, in the United States, energy industries invested an average of US$ 176,000 a year for each worker over the past ten years, compared to compensation of US$101,000 per worker. Thus energy-related industries spend about 75% more on capital than they do on labour. By comparison, firms in computer-related industries spent just US$ 17,000 per worker on capital, one-fifth the rate of labour compensation. These large capital expenditures flow through the economy, creating additional jobs, tax revenues and GDP by creating demand for intermediate goods and services. In the United States, for example, the oil and gas industry spends nearly 50% of revenues on materials and services, with suppliers in construction, fabricated metals, chemicals, computer design, legal and financial services and a broad range of other sectors.

These supplier networks are crucial to understanding the potential economic impact of the energy industry. Countries with a comparative advantage in energy-related skills and capabilities tend to retain more of these benefits domestically. The impact will be smaller in countries that cannot supply materials and expertise locally. The energy industry’s large investment requirements make it very sensitive to the cost of capital. Competition from governments and businesses (including the energy industry) creates scarcity and drives up the cost of capital. However, capital costs are currently extremely low because of the depressed state of the global financial system. Now is a good time to consider investment in capital-intensive industries. In addition to the energy sector’s economic contributions in general, relatively lower and stable energy prices help stimulate the economy. First, lower energy prices reduce expenses for consumers and businesses, increasing disposable income that can be spent in other ways. Second, lower energy prices reduce input costs for nearly all goods and services in the economy, thus making them more affordable. The converse is also true: relatively higher energy prices place a drag on economic growth everywhere except in economies that are dominated by energy production. Global oil prices entered a long upward swing in 2004, and the trend accelerated sharply in 2007. This price rise contributed to the deep recession in the developed world that began in late 2007. Rising energy prices took purchasing power away from consumers, particularly from lower-income groups.

Energy Sector Job Creation...

The energy sector is a crucial part of the economy, thanks to the importance of its products and its direct and indirect contributions to employment and GDP. This text takes a closer look at the energy sector’s effect on employment, broken down into oil and gas production and the construction and operation of power generation capacity. It particularly emphasizes areas of growth in energy production and what follows in terms of jobs and value creation.

Economists generally group energy-related jobs into three categories:

*Direct jobs are held by individuals who are employed or contracted by firms in the sector to produce and deliver energy products to consumers.

*Indirect jobs represent positions created in industries that supply the energy industry with goods and services.

*Induced jobs result from the salaries paid to workers in the first two groups. People directly and indirectly employed in the energy industry spend their incomes and create demand for goods and services, thus increasing aggregate demand and employment in unrelated industries.

In an industry with deep supply chains and high pay, indirect and induced jobs represent an important part of its overall economic contribution. The “employment multiplier effect” measures the contribution that an industry makes to the economy through the indirect and induced jobs it creates. The larger the multiplier for an industry, the greater the positive impact of money spent in terms of creating additional jobs across the broader economy.