The Bubble Economy

Understanding Energy’s Role in the Economy

The tenets of mainstream economics lead you to believe that every sector of the economy is as important as the share of GDP it represents. Historically, the energy industry’s share of the economies in “most OECD countries has been somewhere in the neighborhood of 4%.” Economic theory implies that such a small sector does not matter so much and, therefore, is not a major factor in recessions or economic growth.

In fact, examining the elasticity of demand behind this 4% number will turn that perception around. The fact that the energy sector has, in the postwar decades, been only around 4% of GDP in the average OECD nation in the West is a sign of how much energy has facilitated growth and helped wealth to accumulate; it is not at all a sign that energy isn’t important.

Neoclassical theory also “assumes that economic growth is driven mostly by exogenous forces,” and it “regards the demand for energy (and other resources) as a consequence, not a cause, of economic growth.” That is, many economists see energy as just another item that consumers spend their growing incomes on, instead of appreciating the unique role that ...