[VIEWPOINT]Efficiency as a New Source of Energy

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[VIEWPOINT]Efficiency as a New Source of Energy

There are many examples in history of ominous predictions that never panned out.

The British economist Thomas Malthus predicted that food shortages combined with a population explosion would eventually lead to widespread famine.

The forecast proved wrong. Enough food is produced to feed everyone. Of course, many people suffer poverty and starvation in many regions of the planet, but these problems occur not because of a lack of food but because of uneven development and inefficient distribution. Though the progress in production technology (known as the "Green Revolution") has brought sharp increases in food production, many places in the world have failed to construct methods that ensure adequate food supplies. So poverty and starvation endure.

About 30 years ago there were many predictions of doom. In the midst of the oil crisis, many economists said humanity would soon be crippled by energy price hikes and the exhaustion of energy supplies. They insisted that 20 years in the future, crude oil would dry up completely and humans would face catastrophe if they had failed to develop new energy sources.

If their prediction had proved true, we would right now be in mid-catastrophe: Industrialized countries still depend on crude oil for most of their energy needs and have largely failed to come up with new alternative energy sources. But we are just as well, even better, stocked with oil reserves, and some energy analysts foresee the discovery of more oil fields well into the future.

Though the economists' predictions missed the mark, their warning may have helped us avert severe energy shortfalls.

The warning of an impending energy crisis spurred skyrocketing energy prices, which checked energy demand. One report suggested that the consumption of energy by Americans, the biggest consumers of energy in the world, has decreased by 1.5 percent every year over the 30 years since the warning.

As crude oil prices increased, money was available to advance oil exploration techniques. Thus, new supplies were found, including submarine oil fields that are very costly to locate.

One hypothesis asserts that profits from oil are more reliable than profits from other commodities. When the rate of oil price increase is lower than the rise in interest rates , the hypothesis states, the oil investor will find it more profitable to sell more oil in the market to get enough profit to make up for interest cost. However, when the oil price hike is expected to be higher than the interest rate increase, he is better off suppressing oil sales till the price goes up.

Oil prices have climbed to more than $30 per barrel, causing Koreans consternation, because we now live in a society that is much more energy-dependent. Though we know oil prices increase more rapidly than prices of other goods, we have done nothing to prepare for this drain on our purchasing power. In fact, there is little we can do; we have no oil fields and no high technologies to develop alternative energy sources. The only solution available is to increase our energy efficiency.

We have a very complicated energy price structures. Each unit of energy is a different price depending on the region it is sold in, the context in which it is used and who is using it. The government tries to tackle social problems and injustices - poverty and uneven income distribution, vehicle usage, problems of industrial structure, even water shortages - by adjusting energy prices.

This kind of policy distorts the energy price structure and results in inefficient energy use.

We need to simplify the energy price structure, and adjust prices solely on energy availability. The world will succeed in developing alternative energy sources in the long-run. But until that time, we must establish mechanisms that encourage efficient energy use.


The writer is a professor of economics at Yonsei university.

by Lee Young-sun

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