THE BLOG
10/22/2012 03:28 pm ET Updated Dec 22, 2012

Why High Oil Prices Aren't Necessarily a Bad Thing -- Interview With Ed Dolan

We were fortunate enough to speak with the well-known economist Ed Dolan on various energy and economic issues.

In the interview Ed talks about the following:

• Why cheap energy is not vital to economic growth
• Why high oil prices aren't necessarily a bad thing
• Why the U.S. oil and gas boom is hurting Russia's global influence
• Why Obama's desire to cut oil industry tax breaks could be a great idea
• Why energy policy needs to be completely reformed
• Why Russia's Arctic Exploration could cause the worst environmental disaster to date
• Why renewable energy investors should be very worried about the natural gas boom
• Why the EU was flawed from the start
• Why subsidies for renewables are just plain wrong.
• Why we should give QE3 a chance
• Why abundant natural resources can bring a curse of riches

Interview by Oilprice.com

Ed writes the popular economics blog Ed Dolan's Econ Blog and has just recently released a book: TANSTAAFL (There Ain't No Such Thing As A Free Lunch) - A Libertarian Perspective on Environmental Policy, which you can find out more about here.

OP: Access to cheap energy is vital to economic growth. What do you see happening with the economy over the coming years as the time of cheap oil comes to an end?

Ed Dolan: In my view it is a myth that cheap energy -- "affordable energy" as many people like to say -- is vital to growth. The idea that there is a lockstep relationship between growth of GDP and use of energy is widespread, but the data simply does not bear it out. Instead, what they show is that the world's best-performing economies have become dramatically more energy efficient over time.

The World Bank uses constant-dollar GDP per kg of oil equivalent as an energy efficiency metric. From 1980 to 2010, the high-income countries in the OECD have increased their average energy efficiency by 55 percent. The United States has done a little better than that, increasing its energy efficiency by 81 percent over that period. That's pretty remarkable, considering that we haven't really had a policy environment that is supportive of efficiency.

Think what we could do if we did.

Even after the efficiency gains in efficiency we have made, we still have a long way to go. The U.S. economy is still 15 percent less energy efficient than the average for high-income OECD countries, giving it plenty of room to improve. Switzerland is almost twice as energy-efficient as the U.S., and the UK is 68 percent more efficient.

Some people say that the only reason the United States has been able to grow while using less energy is the deindustrialization of its economy, outsourcing heavy industry to China. However, compare the U.S. with Germany. Germany is an export powerhouse and Europe's best-performing economy, yet its energy efficiency has increased at almost the same rate over the last 30 years as the United States, an 80 percent gain in efficiency compared to 81 percent. Furthermore, despite being proportionately more industrialized than the U.S. and a major exporter, Germany squeezes out 41 percent more GDP from each kg of oil equivalent.

In short, we don't have to hypothesize about the possibility of someday breaking the lockstep relationship of growth and energy use -- we and most of the rest of the advanced world are already doing it.

OP: What effect can you see America's oil and gas boom having on foreign policy?

Ed Dolan: On the whole, I see it as beneficial. Energy dependence has led us to buy a lot of oil from countries that are unstable and/or unfriendly to us. Anything we can do to reduce that dependence gives our foreign policy more room to maneuver. The beneficial effects reach beyond our actual imports and exports. The U.S. gas revolution is having repercussions all the way to Russia, where Gazprom is seeing its market power undermined, and Russia, as a result, is losing some of the geopolitical leverage its pipeline network has given it.

OP: Oil prices have been near to the $100 a barrel mark for some time now, and don't look likely to drop back to previous low levels. What effect could this increased price have on oil importing economies compared to oil exporting economies?

Ed Dolan: Clearly, any oil price increase has the short-term effect of transferring wealth from using countries to producing countries. However, the long-run effects are what matter.

In the long run, high prices just accelerate the trend for using countries to become more efficient and less dependent. Meanwhile, the producing countries often don't manage their oil riches well. They fall victim to the "curse of riches." The curse takes the form partly of a loss of competitiveness in their non-energy sectors (the so-called "Dutch disease"). Partly it takes the form of corruption of their political systems. Russia is a poster child for both aspects of the curse of riches.

To read the full article please visit Oilprice.com

James Burgess is an analyst with Oilprice.com. He is a successful small cap investor with a focus on early stage renewable energy companies.