University of Sussex
Browse

File(s) not publicly available

Exploiting the Oil-GDP effect to support renewables deployment

journal contribution
posted on 2023-06-08, 05:58 authored by Shimon Awerbuch, Raphael Sauter
The empirical evidence from a growing body of academic literature clearly suggests that oil price increases and volatility dampen macroeconomic growth by raising inflation and unemployment and by depressing the value of financial and other assets. Surprisingly, this issue seems to have received little attention from energy policy makers. In percentage terms, the oil–GDP effect is relatively small, producing losses in the order of 0.5% of GDP for a 10% oil price increase. In absolute terms however, even a 10% oil price rise—oil has risen at least 50% in the last year alone—produces GDP losses that, could they have been averted, would significantly offset the cost of increased RE deployment. This paper draws on the empirical oil–GDP literature, which we summarize, to show that (i) by displacing gas and oil, renewable energy investments can help nations avoid costly macroeconomic losses produced by the oil–GDP effect and, (ii) that these avoided losses represent a significant external macroeconomic benefit of such investments. We show that a 10% increase in RE share avoids GDP losses in the range of $29–$53 billion in the US and the EU ($49–$90 billion for OECD). These avoided losses offset one-fifth of the RE investment needs projected by the EREC and half the OECD investment projected by a G-8 Task Force. For the US, the figures further suggest that each additional kW of renewables, on average, avoids $250–$450 in GDP losses, a figure that varies across technologies as a function of annual capacity factors. We approximate that the offset is worth $200/kW for wind and solar and $800/kW for geothermal and biomass. While we focus only on renewables, the GDP offset will apply in some measure to other non-fossil technologies including energy efficiency, DSM and nuclear. The societal valuation of non-fossil alternatives must reflect these avoided GDP losses, whose benefit is not fully captured by private investors. This said, we fully recognize that wealth created in this manner does not directly form a pool of public funds that is easily earmarked for renewables support. Finally, the oil–GDP relationship has important implications for correctly estimating direct electricity generating cost for conventional and renewable alternatives and for developing more useful energy security and diversity concepts. We also address these issues.

History

Publication status

  • Published

Journal

Energy Policy

ISSN

0301-4215

Publisher

Elsevier

Issue

17

Volume

34

Page range

2805-2819

Pages

15.0

Department affiliated with

  • SPRU - Science Policy Research Unit Publications

Notes

This data-driven paper investigates the effect of oil price rises on GDP losses, and extends the literature here to gauging the macroeconomic impact of investment in renewables to replace oil. The paper has been delivered to policy-makers. Output shared 50% with deceased former SPRU senior fellow.

Full text available

  • No

Peer reviewed?

  • Yes

Legacy Posted Date

2012-02-06

Usage metrics

    University of Sussex (Publications)

    Categories

    No categories selected

    Exports

    RefWorks
    BibTeX
    Ref. manager
    Endnote
    DataCite
    NLM
    DC