Energy Use and the U.S. Economy

June 1990

OTA-BP-E-57

NTIS order #PB90-254145
Recommended Citation:

U.S. Congress, Office of Technology Assessment, Energy Use and the U.S. Economy,

OTA-BP-E-57 (Washington, DC: U.S. Government Printing Office, June 1990).

Library of Congress Catalog Card Number 89-600722

For sale by the Superintendent of Documents

U.S. Government Printing Office, Washington, DC 20402-9325

(order form can be found in the back of this report)
Foreword

In 1988 the Office of Technology Assessment published Technology and the American

Economic Transition outlining ways that new technologies have redefined options for

stimulating economic growth. A centerpiece of that study was to trace how the structure of the

U.S. economy had evolved by looking at how the demand for products and the processes used

to produce those products (technology) had changed.

The Subcommittee on Energy and Power of the House Committee on Energy and

Commerce asked OTA to use the experience gained in the economic transition study to

provide a perspective on how patterns of energy use have changed with shifts in the economy.

Instead of looking at specific technologies or individual economic sectors, this paper takes a

broader perspective and looks at how the consumption of energy is affected by various

macroeconomic factors such as international trade, technology, or mix of spending. By

applying this analysis on the changes that occurred in the sixties, seventies, and eighties, the

report offers some insights on the forces at work in the economy that could affect future trends

in energy use.

In particular, we examine the period from 1972 to 1985, an era when the apparent link

between energy use and economic growth became separated-a departure from the experience

of most of the fifties and sixties. From 1972 to 1985, the average growth rate of the Gross

Domestic Product (GDP) was 2.5 percent per year, but energy use increased at an annual rate

of only 0.3 percent. We find that this leveling of energy use was due to large offsetting factors

where increases in energy use associated with growth in the overall size of the economy were

balanced by reductions in energy use associated with improved energy efficiency and changes

in the structure of the U.S. economy.

The background paper extends the analysis of energy use into new areas by explicitly

looking at how energy use has changed with the expansion of the service sector, the explosion

of international trade, and greater complexity of the U.S. economy as the structure of

businesses changed in response to new technologies and competitive challenges. The

increasing sophistication of the U.S. economy means that the role of energy is less likely to

be directly identified and is instead more likely to be an indirect factor that was added many

steps before in the complex network that connects producer to consumer. This report explicitly

separates direct from indirect energy use.

OTA acknowledges the generous help of the reviewers and contributors who gave their

time to ensure the accuracy and completeness of this report. OTA, however, remains solely

responsible for the contents of this background paper.

. . .

Ill
Reviewers and Contributors

Amy Able

Congressional Research Service

Sam Baldwin

Office of Technology Assessment

Gale A. Boyd

Argonne National Laboratory

Alan Crane

Office of Technology Assessment

G.R. Davis

Shell International Petroleum Co.

Faye Duchin,

Director

Institute for Economic Analysis

Joy Dunkerley

Office of Technology Assessment

Richard A. Hale

U.S. Government Accounting Office

Bruce Hannon

University of Illinois at Urbana-Champaign

Robert Herendeen

University of Illinois at Urbana-Champaign

Richard Hilt

Gas Research Institute

Bruce G. Humphrey

Edison Electric Institute

Hillard G. Huntington

Stanford University

Henry Kelly

Office of Technology Assessment

Paul Komor

Office of Technology Assessment

Jonathan Lemco

National Planning Association

Sheila Machodo

Renew America

Mark Pastore

Putnam, Hayes & Bartlett

Steven Plotkin

Office of Technology Assessment

Adam Rose

Pennsylvania State University

Marc Ross

University of Michigan

Robin Roy

Office of Technology Assessment

Maxine L. Savitz

Garrett Engines

Lee Schipper

Lawrence Berkeley Laboratory

Irv Snyder

Dow Chemical Co.

Ronald Wishart

Union Carbide Corp.

Francis Wood

Applied Energy Services

NOTE: OTA is grateful for the valuable assistant and thoughtful critiques provided by the reviewers and contributors. The

views expressed in this OTA background paper, however, are the sole responsibility of the Office of Technology

Assessment.

iv
Energy Use and the U.S. Economy

OTA Project Staff

Lionel S. Johns, Assistant Director, OTA

Energy, Materials, and International Security Division

Peter D. Blair, Energy and Materials Program Manager

Andrew W. Wyckoff, Project Directorl

Contributor

Stephen D. Casler

Administrative Staff

Lillian Q. Chapman Linda L. Long Phyllis Brumfield
Contents

Page

Part I: Introduction...................................................................................................................1

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Endnotes for Part I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Part II: Analytical Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Definitions and Assumptions . . . . . . . . . . . . . . . . .. ... ... ... 9

The OTA Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Endnotes for Part II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Part III: Recent Changes in Energy Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Tracing the Change in Energy Use.. . . . . . . . . . . . . . . . . . . . . . . . ........ . . . . . . . . . 17

Summary of the Change in Energy Use Since 1972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Endnotes for Part III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Part IV: Energy Use in the Recent Past and in the Future... . . . . . . . . . . . . . . . . . . . 41

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ... ... ... ... .. . 41

Changes in Energy Use From 1985 to 1988..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Speculation About Energy Use in the Future. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ... ... ... 48

Endnotes for Part IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Part V: Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Data Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Strengths and Weaknesses of the OTA Energy Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Endnotes for Part V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Boxes

Box Page

A. Terminology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

B.Energy Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

C. The OTA Energy Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

D. Correspondence Between Conventional Energy Categories and OTA Energy

Model Categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

E. The World Car . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

F. An Example of the Deflation Process: Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

G. Input-Output Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Figures

Figure Page

l. Index of U.S. Energy Use, GDP, and Energy Intensity . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2. Changes in Energy Use, 1972-85 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

3. Major Categories’ Share of Merchandise Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

4. U.S. Energy Use by Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

5. Changes in U.S. Energy Consumption, 1963-85 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

6. Changes in U.S. Energy Consumption, 1972-85. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

7. Changes in U.S. Energy Consumption Due to Spending, l963-85 . . . . . . . . . . . . . . . . 19

8. Changes in U.S. Energy Consumption Due to Spending, 1972-85 . . . . . . . . . . . . . . . . 19

9. Changes in U.S. Energy Use Due to Spending on Different Product Groups . . . . . . . 21

10. Energy Use and Changes in Energy Use Associated With Spending by

Product Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
11. Direct and Indirect Energy Use by Households and Government Due to

Spending, 1963-85 ... ... ... ... ... ... ... ... ... ... ... ... ... . ... . 23

12. Direct and Indirect Energy Use Associated With Imports and Exports . . . . . . . . . . . . 26

13. Changes in U.S. Energy Use Due to changes introduction Recipe, 1963-85 . . . . . . 28

14. Changes in U.S. Energy Use Due to Changes in Production Recipe, 1972-85 . . . . . 28

15. Ranking of Primary Energy Intensity of Selected Products . . . . . . . . . . . . . . . . . . . . . . 31

16. Changes in Energy Consumption, 1972-85 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

17. Reduction in Energy Use, 1972-85 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

18. Composite Fossil Fuel Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

19. Implicit Price Paid per Btu of Refined Petroleum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Tables

Table Page

l. Changes in Primary Energy Use Due to Selected Factors, 1972-85 . . . . . . . . . . . . . . . . . 4

2. Changes in Primary Energy Use From 1972 to 1985 by Energy Type Due to

Major Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

3. Changes in Primary Energy Use From 1972 to 1985 by Energy Type Due to

Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

4. Changes in Primary Energy Use From 1972 to 1985 by Energy Type Due to

Spending on Different Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

5. Changes in Primary Energy Use From 1972 to 1985 by Energy Type Due to

Sources of Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

6. Changes in Primary Energy Use From 1972 to 1985 by Energy Type Due to

Production Recipe Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

7. Changes in Primary Energy Use From 1972 to 1985 by Energy Type Due to

Energy Production Recipe Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

8. Changes in Primary Energy Use From 1972 to 1985 by Energy Type Due to

Nonenergy Production Recipe Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

9. Primary Energy Intensities by Commodity for Selected Years . . . . . . . . . . . . . . . . . . . . 32

10. BLS Projections of GNP Growth Rates and Unemployment Rates Under

Scenarios of Low-, Moderate-, and High-Economic Growth . . . . . . . . . . . . . . . . . . . . . 47

11. BLS Projections of Output by Major Industry Division Under a Scenario of

Moderate Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

12. Commercially Available Technologies That Improve Energy Efficiency . . . . . . . . . . 49

13. Primary Energy Conversion Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

14. Comparison of OTA Energy Consumption Estimates With Estimates

Published by the Department of Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

15. OTA Energy Model Data Sources and Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

16. Comparison of OTA GNP Estimates With Estimates Published by the

Bureau of Economic Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

17. Listing of Broad Sectors and Individual Industries/Commodities in the

OTA Energy Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Part I

Introduction

OVERVIEW

Energy is a fundamental input into our economy,

essential for running the country’s factories, shipping the Nation’s output, and ringing up the sales.

Energy is also a final product consumed by itself,

responsible for providing many of the comforts of

life that people have grown accustomed to: heat in

the winter, light at night, cool air in thesummer, and

mobility, to name a few. But the consumption of

energy has drawbacks as well. Energy use generates

pollution and can hurt our balance of trade while

making the United States vulnerable to foreign

pressures. i

Shifts in Energy Use and Gross Domestic

Product (GDP)

Given the critical role energy plays in our

economy, it is important that we understand how

energy use has changed with changes in our economy. Figure 1 gives an overview of this relationship.

After World War II, growth in our economy, as

reflected by GDP,ii and increases in energy, measured in British thermal units (Btu),iii appeared to be

in lock step. From 1950 to 1971, energy use and

GDP both increased at an average annual rate of 3.5

percent. Although deviations from this trend occurred in the mid- 1950s and mid- 1960s, growth in

the two factors were highly correlated.l Economic

growth was assumed to be linked to increases in

energy use and public and private investments were

made that rested on this assumption.2

In the early 1970s, the apparent link between

increasing GDP and rising energy use came unraveled. Between 1972 and 1985, 20 million homes

were added to the country’s housing stock, the fleet

of vehicles on America’s roadways increased by 50

million, the number of business establishments rose

by 1.5 million, and the GDP grew by 39 percent in

real terms.3 But energy use had remained basically

flat. Although the average growth rate of GDP was

2.5 percent per year over this period, energy use

increased at an annual rate of only 0.3 percent.4 The

energy intensity or units of Btu used to produce a

dollar’s worth of the economy’s output (GDP),

which was relatively flat from 1950 to 1971, fell by

2.4 percent per year from 1972 to 1985, resulting in

an overall drop in U.S. energy intensity of over a

quarter from 1972 to 1985.5

This trend of decreasing energy use per dollar of

GDP ended in 1986. From 1986 to 1988, the two

factors began to grow in parallel again with energy

use increasing at a 3.9 percent annual rate and GDP

growing at 4.1 percent. The energy intensity of the

U.S. economy fell at a meager annual rate of 0.2

percent between 1986 and 1988.

Purpose and Scope

The purpose of this report is to:

explore how this drop in energy intensity between

1972 and 1985 occurred,

why it stopped between 1986 and 1988iv and

briefly speculate about what is likely to happen in

the future.

The factors underlying this changing relationship

between energy use and the economy are important

for understanding the role energy plays in the

economy, how that role has changed, and how it is

likely to evolve in the future.

Tracing how the connection between changes in

energy use and changes in the economy has evolved

requires identifying specific factors that are critical

variables in the process. This report explicitly looks

at how changes in the level of overall spending, the

mixture of what is being purchased, international

trade, and how things are made (technology) affect

energy use.
2 ● Energy Use and the U.S. Economy

1.6

1.5

1.4

1.3

1.2

1.1

1.0

0.9

0.8

0.7

0.6

0.5

0.4

Figure l-index of U.S. Energy Use, GDP, and Energy Intensity

1972 ■ 1.00

I

/

/

/

/

/

/

0.0

1952 1956 1960 1964 1968 1972 1976 1980 1984 1988

Energy use (Btu) and economic growth (GDP) grew in parallel from 1952 to 1971, causing the energy intensity (Btu/GDP) to be relatively

flat. After 1971, GDP continued to grow, but energy use stayed relatively constant, resulting in a decline in the energy intensity until 1988.

Due to an increase In energy use after 1985, the energy intensity stayed level from 1988 to 1988.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Acoounts, table 1.2; U.S. Department of Energy,

Energy information Agency, Annual Energy Review 1987 table 4; and the Monthly Energy Review, August 19S9, table 1.4.

This separation is important because confusion

abounds over how the United States was able to keep

the economy growing during the 1970s and 1980s,

but hold energy use steady. Some observers attribute

the decline in Btu used per dollar of GDP solely to

increases in energy efficiency.6 This is only part of

the story. Factors such as changing tastes, incomes,

demographics, and international competition led to

a shift in the makeup of the economy’s output as

“smokestack’ industries’ position declined relative

to services and light manufacturing.7 This change in

the structure of the economy also led to less energy

used per dollar of output produced. Some of this

confusion between declining Btu per dollar of output

(energy intensity) and increased energy efficiency is

due to semantics and different assumptions. Part II

of this report describes in more detail the definitions

and analytic structure used in this analysis.

The bulk of the report focuses on the 1972-85

period when energy use stayed flat, but the economy

continued to grow (part III). Many other studies have

examined the relationship between energy use and

the U.S. economy during the 1970s and early 1980s,

focusing on the effect of energy efficiency and

industrial shifts within the economy on energy use.

This report is in general agreement with those

studies, but extends the analysis into several new

directions.8

One of these differences is that most previous

research focused exclusively on the industrial

sector of the U.S. economy—roughly 30 percent of

GDP.9 This study covers all sectors of the economy.

v Defined as the sum of the agriculture, mining, construction and manufacturing sectors.
Part Introduction ● 3

Technological advances in information processing (computers, communications, robotics, etc.) are

changing the nature of the U.S. economy, making it

more complex and interdependent. For example, a

dollar spent on food ends up providing only 15 cents

to the sector that includes agriculture and 26 cents to

manufacturing. Forty cents of the dollar spent on

food is retained by services such as transportation

and retail trade, an additional 13 cents goes to

transactional services like banking, advertising, and

law.10 Information technologies have increased the

interdependence of these different sectors, creating

networks that link the consumer to the retailer, the

retailer to the manufacturer, and the manufacturer to

his suppliers.

11 In an economy such as thiS one,

conventional divisions that separate manufacturing

from services and the commercial sector from the

transportation sector, miss the interaction that occurs

between those components.

In a highly developed economy consisting of

innumerable interconnections, the role of energy is

less likely to be directly identified and is instead

more likely to be an indirect factor that was added

many steps before in the complex network that

connects producer to consumer. For example, to

assemble all of the motor vehicles made in 1985

required relatively little direct energy, about 0.23

quadrillion Btu (quads), but it required 1.22 quads of

indirect energy use because the materials used in a

car (steel, rubber, glass, plastic) require a lot of

energy in their manufacture and fabrication. Thus,

most of the energy associated with making a motor

vehicle is not at the assembly plant, but was added

a few steps before at the steel mill, tire plant, or glass

factory. From this perspective, a change in the

nonenergy inputs (e.g., material substitution) used to

make a product could indirectly affect energy use.

This report explicitly separates direct and indirect

energy use.

This division between direct and indirect energy

use is especially appropriate when the energy

associated with international trade is considered.

Most calculations presented in this analysis as well

as most conventional measures of U.S. energy use,

include only direct energy imports-such as barrels

of oil or megawatt-hours of electricity. Nevertheless,

as production networks continue to extend beyond a

country’s borders, the inclusion of the indirect

energy embodied in the trade of nonenergy products

is increasingly important in calculating a country’s

total energy use. For example, including only the

direct energy needed to make a U.S. automobile

would miss the energy embodied in a steel axle that

was imported from Japan.

Lastly, this analysis goes beyond most previous

work by sketching how energy use changes with

shifts in the economy. This greater detail adds

explanatory power and helps in connecting the

findings to public policies. For example, the broad

category of structural change is divided into changes

emanating from consumers and businesses. Changes

due to consumer spending are looked at from three

angles: overall level and mix of the products

purchased, sources of consumption (e.g., households, government), and type of product being

consumed (e.g., manufactured goods v. services).

Similarly, shifts in energy use due to changes in the

way businesses make their products are broken

down by type of product and by changes that either

directly or indirectly affect energy use (e.g., material

substitution).

The model used for this analysis, like all simulations of reality, is not free of shortcomings. These are

outlined in part II. In particular, no attempt was made

to explain why these changes in the economy or in

energy use occurred. Instead, only the question of

how shifts in the economy affected energy use is

explored. As a result, although the industrial structure of the economy and the implementation of

technology is undoubtedly affected by changes in

tastes, incomes, government regulations, and the

relative prices of products-especially the huge

changes in the prices of energy-these factors are

not explicitly addressed in this report.12

Summary of Findings

A number of policy issues, such as climate

change, disposal of nuclear waste, the trade deficit,

acid rain, and military security, are directly tied to

energy use. Understanding how energy use has

changed is instrumental to designing policies that

address these issues. This section draws lessons

from the findings in part III and part IV.

Economic Growth and Energy Use

● Economic growth is not necessarily contingent

on using more energy. OTA analysis finds that

between 1972 and 1985 economic growth, at

least as it is broadly defined as growth in GDP,

was not linked to ever-increasing levels of
4 ● Energy Use and the U.S. Economy

energy use;vi in fact, slow economic growth

tended to cause changes that impeded strides

towards improving energy efficiency. Although sheer growth, holding all other changes

constant, does increase energy use, economic

growth never occurs in a vacuum; rather,

growth is likely to be associated with other

factors such as shifts in the mix of spending

towards less energy-intensive products and

changes in the way the output of the economy

is produced that result in a decline in energy

use. Together, these factors contributed to little

or no increase in energy use between 1972 and

1985 (table 1).

Energy Efficiency v. Structural Change

Energy-efficiency improvements implemented in

the production process between 1972 and 1985

mean that the 1985 economy would have used 15

quads more of energy if these gains had not been

achieved. If these savings had not occurred, the

U.S. economy would have required 20 percent

more energy in 1985 to produce its output-more

than the total amount of energy imports in 1985.

(See figure 2.) Two-fifths of these savings came

from the manufacturing sector, but another fifth

came from the service sector.

The leveling of energy use from 1972 to 1985 was

not solely due to improvements in energy efficiency, but was also caused by structural shifts in

the economy. Of the factors that offset the increase

in energy use due to increases in the sheer size of

the economy, nearly two-thirds of the 1972-85

decline was because of energy-efficiency improvements; the remaining third was due to a

realignment of the industrial composition of the

economy. The output of the economy shifted

towards less energy-intensive industries such as

services. This shift was caused by changes in the

mix of what consumers demanded and by technological improvements in production processes

which indirectly saved energy. If these structural

shifts between 1972 and 1985 had not happened,

the energy used in 1985 would have been about 13

percent higher (9.5 quads).

Table l-Changes in Primary Energy Use

Due to Selected Factors, 1972-85

(quadrillion Btu)

Actual 1972 to 1985 energy use increase . . . . . . . 1.9

Change due to spending . . . . . . . . . . . . . . . . . . . . 14.4

Change due to the level of spending . . . . . . . . . 17.7

Change due to the mix of spending. . . . . . . . . . -5.8

interaction of level and mix . . . . . . . . . . . . . . . . 2.5

Change due to production recipe . .............-19.5

Change due to the energy portion . . . . . . . . . . . -15.4

Change due to the nonenergy portion . . . . . . . . -3.7

interaction of the energy and nonenergy. . . . . . . . -0.4

interaction of spending and production recipe . . . 7.1

NOTE: Numbers may not add due to rounding.

SOURCE: Office of Technology Assessment, 1990.

Figure 2-Changes in Energy Use, 1972-85

Quadrillion Btu

9 0 -

8 0 -

70-

60-

50-

4 0 -

30 i

20 d

10

0

~

Actual use Actual use

-—-— — – I

1972 1985

Years

Actual energy use in the OTA mode, (clear boxes) increased from

72.5 quads in 1972 to 74.9 quads in 1985. Nearly 100 quads

would have been used in 1985 if energy savings, because of

efficiency improvements (black box) and structural changes

(hatched box) in the economy, had not occurred over this period.

Of these savings that occurred, nearly two-thirds were because of

energy-efficiency improvements in the production processes

employed by businesses. The remaining third of the decline,

structural change, is indicative of shifts in the industries that make

up the economy.

NOTE: This figure does not refleet changes in energy use due to overall

growth or interactive factors. See table 1 for these effects.

SOURCE: Office of Teehnoiogy Assessment, 1990.

Direct v. Indirect Use of Energy

● Energy is increasingly being consumed indirectly,

embodied in nonenergy products, while the

growth in the direct use of energy has been

relatively small. Of the increase in energy use

between 1972 and 1985 due to spending on all

products, only 8 percent was due to direct

purchases of energy products like gasoline and

fiIt should be kept inmind that the economic experienee in the 1970s and early 1980s was not free from problems: several reeessions occurred, inflation

and unemployment bit very high levels, productivity rates declined, and budget and trade deficits emerged.
<

Part I--Introduction ● 5

●

●

heating fuel. The remaining 92 percent of the

increase in energy use due to spending was

indirectly induced by the purchases of nonenergy

products that embody energy like clothes, tires,

and automobiles.

The bulk of the increase in indirect energy use

between 1972 and 1985 came from demand for

services. vii Although the energy intensity of the

service sector is low, its size and rapid growth

have meant that its total energy use is larger than

manufacturing ’s. The source of much of this

indirect demand for energy is personal consumption (households), where indirect demand for

energy outpaced direct demand by a factor of 3

from 1972 to 1985.

Energy savings can also be achieved indirectly.

Nearly a fifth of the reduction in energy use

achieved from 1972 to 1985 because of changes

in businesses production processes came indirectly as less energy-intensive inputs like plastic

were substituted for more intensive inputs like

steel. Almost all of these savings were made in the

manufacturing sector.

International Trade

●

●

Imports of energy products (not including the

embodied energy in nonenergy products) are a

significant component of our trade deficit. Although the portion of all imports that are energy

(“petroleum and products”) has dropped from a

high of 42 percent in 1977 to 18 percent in 1988,

oil imports are still a higher fraction of constant

dollar imports than autos, all consumer goods, or

all industrial supplies and materials (excluding

oil) (see figure 3).viii Of the major merchandise

trade categories experiencing a trade deficit in

1988, oil represented almost a quarter of the

total13 and its share seems to be increasing.14 The

share of oil that comes from imports has risen to

44 percent, almost matching our highest level of

dependency set at 46 percent in 1977.15

The United States’ grosstx energy use would be 9

percent higher if we included the energy embodied in nonenergy imports. The statistics that show

a leveling of domestic energy consumption fail to

Figure 3-Major Categories’ Share of Merchandise

Imports (1982 dollars)

1970 1972 1974

= oi l = industrial supplies = consumer goods

autos, all consumer goods, or all industrial supplies and materials

(which exclude oil).

NOTE: In order to compare the trend over time, the data is presented in

constant 1882 dollars. Due to changes in the pffees of some goods

sines 1982, like oil, this may have a distorting effect on some

categories.

SOURCE: U.S. Department of Commeree, Bureau of Economic Analysis,

National Income and Product Accounts, table 4.4.

reflect the fact that the United States indirectly

consumes energy by importing nonenergy imports like cars and steel. As the trade deficit has

deepened, so has this indirect energy use. OTA

estimates that in 1985, the United States consumed roughly 7 quads of energy in nonenergy

imports like cars and steel. When this is added to

our direct imports of energy, our 1985 foreign

energy dependence increases by 50 percent. In

terms of recognizing our dependence on foreign

sources for energy or our global contribution to

problems like climate change, it is important to

include estimates of the energy associated with

nonenergy imports. 16 Failing to make this adjustment, it would be easy to show declining energy

use simply by importing energy-intensive final

products and intermediate inputs from abroad.

When this adjustment is made, instead of a 39

percent drop in the use of imported energy from

1977 to 1985, the decline is reduced to 21 percent.
6 ● Energy Use and the U.S. Economy

Differences Between Energy Types

Businesses’ energy use in the United States is very

flexible and adaptable. The composition of energy use due to changes in production processes

has changed dramatically from 1972 to 1985 with

the use of crude oil& gas falling by 19 quads over

this time period. The drop occurred primarily in

manufacturing’s use of crude oil & gas,x but the

energy sector itself and the service sector also

made significant contributions to the decline.

Declines in energy use were not universal across

all energy types. Energy is not a homogeneous

entity, but is instead composed of widely differing

products which have very different uses and

qualities. The slight increase in overall energy use

from 1972 to 1985 came from increases in the use

of coal (primarily used to produce electricity) and

primary electricity that were largely offset by

declines in the use of crude oil& gas and refined

petroleum. In aggregate, energy use per dollar of

GDP declined from 1972 to 1985, but within

individual energy types, all of the decline occurred in crude oil & gas, refined petroleum, and

utility gas. Coal and primary electricity registered

a slight increase in use per dollar of GDP during

this period.

Energy Use From 1985 to 1988

● The trend of level energy use established from

1972 to 1985 was broken between 1985 and

1988 when energy use increased by 8 percent

(5.7 quads). The energy intensity of the economy stayed constant from 1986 to 1988,

dropping at a meager 0.2 annual rate as opposed

to the –2.4 percent annual decline achieved

from 1972 to 1985.

● Much of the increase in energy use from 1985 to

1988 can be traced to strong economic growth

and a shift in the mix of consumption towards

more energy-intensive products. The 1985-88

period was a time of strong economic growth: real

GNP grew at an annual rate of 3.6 percent, v. 2.5

percent for the 1972-85 period.

● The major shifts towards an energy-intensive mix

●

●

of spending occurred in the government and

international sectors. Federal Government spending on nondefense purchases fell by 16 percent

over the 3-year period and defense purchases,

which are about 1.5 times as energy intensive as

nondefense purchases, grew by 10 percent. Likewise, the energy-intensive export sector experienced the fastest rate of growth of any sectorxi

during this period, increasing its share of GNP

from 10 to 13 percent. Even “smokestack”

industries like steel and aluminum experienced a

resurgence. 17 Overall, exports between 1985 and

1988 grew in real terms by 44 percent while

imports increased by only 28 percent.

Of the 10 major sectors of the economy,xii

manufacturing increased its share of total shipments the most from 1985 to 1988, growing from

32.9 percent of all shipments to 33.8. This

increase in manufacturing’s share of gross output

halted a downward trend that had prevailed since

1972.

There is little data to support the idea that the

1985-88 increase in energy use was due to less

efficient production processes. The annual rate of

investment in new plant and equipment from 1985

to 1988 was 7 percent, 2 percentage points higher

than the 1972-85 annual investment rate-a

period of declining energy use per dollar of

output. It is unlikely that these 1985-88 investments caused a reduction in energy efficiency,

rather they probably improved energy efficiency,

but data detailed enough to confirm this is not

available.

Energy Use in the Future

● Predictions about the rate of economic growth

suggest that the increase in energy use should

be less in the future than what was experienced

between 1976 and 1988. The annual growth

rate of GNP between 1976 and 1988 was 2.9

percent. The Department of Labor’s moderate

economic growth scenario for 1988 to 2000

assumes a 2.3 percent growth rate.
Part Introduction . 7

In terms of energy use associated with changes in

the composition of output (e.g., structural

change) the picture is mixed. The manufacturing

sector is predicted to benefit from increases in

exports as the trade deficit narrows, while being

hurt by decreases in defense spending as efforts

are made to decrease the budget deficit. On net,

manufacturing’s share of output is predicted to

increase, but much of the growth is in “hightech” products that have relatively low energy

intensities. When viewed across all sectors,

changes in energy use associated with changes in

the structure of the economy do not appear to be

signtificant.

The future impact of technology on energy use is
8 ● Energy Use and the U.S. Economy
Part II

Analytical Structure

The analysis on which this report is based uses an

economic model built to explain how energy use

changed with changes in the economy. Such an

approach necessitates using special terms, making

simplifying assumptions, and creating a simulation

of reality which, like any imitation, has its strengths

and weaknesses. The following section outlines

these subjects.

DEFINITIONS AND ASSUMPTIONS

Looking at how different factors in the economy

affect energy use requires use of a consistent set of

terms that represent particular economic phenomenon, such as spending or output. (See box A for a

summary of terms.) Foremost among these definitional issues is the need to distinguish between

energy-intensity, energy efficiency, and structural

change in the composition of the economy’s output.

Energy Intensity

Energy intensity, on an economy-wide level, is

the amount of energy consumed per net unit of

economic value produced (e.g., British thermal units

(Btu) per dollar of Gross Domestic Product (GDP)).

On an industry-specific level, energy intensity is

defined as the amount of energy consumed per unit

of gross output produced. The difference between

the use of gross and net output figures is that the net

measure includes only the value a particular business adds in its production process. The gross

measure includes this value as well as the value of all

the inputs used in that firm’s production process. On

an economy-wide level, the net value of output is

used because when the gross measure is aggregated

across industries it results in double counting, since

the output of one industry is frequently used in the

production of the output of another industry. But on

an industry-specific level, gross output is a better

measure for calculating the energy intensity because

the inclusion of all of the inputs makes it a better

reflection of that industry’s production process.18

The economy’s energy intensity can change

because of changes in the energy efficiency of the

economy or because of a shift in the industrial

makeup of the economy. For example, the energy

used per dollar of GDP (energy intensity) can

decline over time simply because a bigger share of

the GDP is composed of services that are less

energy-intensive relative to other industries like

manufacturing. With such a shift, the energy intensity can decline without any change in the energy

efficiency.

Energy Efficiency

The distinction between energy intensity and

energy efficiency is achieved by narrowly defining

energy efficiency as the introduction of new processes (e.g., electric arc furnaces in steelmaking) or as

the improvements in the operation and maintenance

of existing production facilities that affect the

amount of energy used to produce a unit of output in

a particular industry .19 In the model constructed for

this analysis, the inputs such as energy, materials,

and services, are known for each industry over time.

Since each industry uses a different level and

mixture of inputs to produce its output, the variations across industries look like different cooking

recipes. Given this, the term production recipe is

used to represent the combination of these inputs.

(See box A). A change in the energy portion of this

production recipe per unit of output is defined as a

change in energy efficiency.

Structural Change

This definition of energy efficiency does not

include energy efficiency gains realized outside of

the formal marketplace such as in households. For

example, household technologies such as more

efficient appliances or more fuel-efficient automobiles are not included because households do not

produce output that is officially counted as economic activity as defined by GDP.20 But these

technologies do affect the mixture of what households buy: a more energy-efficient refrigerator

means that a household’s market basket might

include less electricity, freeing up money to be spent

on other items such as clothing. This shifting

mixture of what consumers buy, called spending mix

in this analysis, has a direct affect on what businesses produce, which in turn alters the composition

of output. In this example, the shift in spending from

electricity to clothing translates into a shift in output

to a less energy-intensive mix of industries as output

in the electric utility industry declines relative to the

apparel industry. Whether or not the clothing was

domestically produced also has ramifications on the

structure of U.S. output and energy use. Thus,

-9–

21-544 0 - 90 - 2 : QL 3
10 ● Energy Use and the U.S. Economy

Box A—Terminology

The model used in this analysis consists of several components or variables that can be separately analyzed

to show their role in changing energy use from 1963 to 1985. For simplicity’s sake, the variable names listed below

are defined and consistently used throughout the analysis to represent a particular factor.

At the broadest level, the model consists of three primary variables: spending, production recipe, and an

interactive factor.

Spending: Spending represents the purchase of finished (final) goods and services by personal consumers, all forms

of government, business investment in plant and equipment, change in business inventories, and net foreign

demand for U.S. products (exports minus imports). The sum of consumption across all products equals the Gross

National Product. Consumption is analyzed from three perspectives: level and mix, product groups, and sources.

Level and mix: The level of spending refers to the total constant dollar value of spending (final demand) in a

particular year. As the population and aggregate income of the country increases, the level of spending is expected

to increase also. The level of spending in 1985 was 39 percent higher than the 1972 level.

The mix of spending represents the portion of consumption comprised of a particular product. Although the level

of spending might not change, the mix of what is consumed could shift. For example, the share of personal

consumption spent on health care increased from 8 percent to 10 percent from 1972 to 1985. 1

Product groups: Spending can be divided into five product groups-energy, natural resource goods, manufactured

goods, transportation services, and services-to show how consumption broke down by broad categories of

products. Over time, each of the product groups reflect changes due to the level of spending of each group and

changes in the mix of products within the broad groups. By separating energy products (e.g., oil, gas) from other

products an estimate of energy that is used directly and indirectly can be derived.

Sources of spending: The consumption of any year can also be divided into five origins of expenditures--

households, government, business investment, changes in inventories, and international trade (exports and

imports). Like the product groups, each of the sources of consumption includes changes due to the level of

spending associated with each source and changes in the mix of products bought by each source.

Production recipe% Production recipe refers to the formula by which businesses produce goods and services

purchased by consumers. This formula explicitly includes the ingredients (inputs) used and implicitly includes

the method and capital equipment employed. For example, the production recipe for motor vehicles includes such

things as steel, rubber, and financial services. Broadly speaking, the production recipe is a proxy for changes in

technology and know-how. The production recipe is divided into two categories: the energy portion and the

nonenergy portion.

Energy: The energy portion of the production recipe refers to how energy is used as an input by industry. It

represents the direct use of energy as an intermediate input by business. Changes in this factor per unit of output

reflect changes in energy efficiency.

Nonenergy: The nonenergy portion of the production recipe represents all the other inputs to business such as steel,

plastics, advertising, and financial advice. Each of these inputs indirectly embody energy because some energy

was required in their creation.

Interaction: Interaction is the change that results from the simultaneous movement of two variables (e.g., spending

and production recipe)--an effect that cannot be cleanly attributed to one variable or the other. An example might

include the simultaneous decline in the consumption of gasoline due to more efficient automobiles (a

consumption mix change) and the fact that automobile manufacturers decreased the energy intensity associated

with a car’s production recipe, making them smaller and lighter by substituting plastic for steel. This would

generate an interaction effect between spending and production recipe. The interaction effect is discussed in

greater length in the appendix.
Part II--Analytical Structure . 11

international trade is a critical component in this

analysis.

Another part of structural change comes from how

businesses alter the nonenergy inputs in their production recipe. Technological developments in

equipment or methods can alter the type and mixture

of inputs in this recipe. For example, to make 1,000

dollars’ worth of motor vehicles in 1972 required,

among other things, 28 dollars’ worth of rubber and

plastic inputs, 74 dollars’ worth of steel, and $17 of

business services. By 1985 the recipe for motor

vehicle output had shifted so that to produce 1,000

dollars’ worth of output the industry used $41 of

rubber and plastic, 53 dollars’ worth of steel, and $22

of business service inputs.

21 These types of shifts

affect the relative output of different industries,

acting as another component of structural change.

Thus, structural change, as defined in this report,

is the combined effect of two factors: a changing mix

of consumer spending on products and changes in

the use of nonenergy inputs by businesses in their

production processes.

Economic Growth

Besides being affected by changes in energy

efficiency or structural change in the make-up of the

economy, energy use can be altered by the overall

size or level of the economy. The sum of spending

on all products from all sources in a particular year

is one way to measure the Gross National Product.xiii

If the mix of what people buy (spending mix) and the

method by which these products are produced

(production recipe) does not change, energy use can

still increase if the sheer number of things consumed

increases (spending level). Therefore, if everything

else is held constant, but there are more people

buying more cars and living in more houses, energy

use will increase.

Spending by Product Groups

By splitting overall spending into broad product

groups-energy, natural resource goods, manufactured goods, transportation services, and all other

services-direct spending on energy products like

oil and gasoline can be separated from spending on

nonenergy products such as clothing, autos, or

insurance policies, which indirectly embody energy

from the process used to produce them. Similarly,

different industries’ production recipes can be

lumped together into product groups, revealing

which sectors have achieved the bulk of the energy

efficiency gains or have indirectly changed their

energy use through altering the use of nonenergy

inputs. As used in this analysis, changes in product

groups reflect both changes in the level of spending

for that product and changes in the composition of

that group. For example, spending on transportation

services has grown over time (spending level) and

the makeup has shifted from spending on railroads

to air travel (spending mix).

Sources of Spending

Spending is also broken down into the four

sources it originates from: 1) households, 2) business investment, 3) changes in inventories, and 4)

international trade (imports and exports). Obviously, households have a much different level and

mix of spending than government.

Interactive

A consequence of the analytical structure used in

this report is the generation of an interactive

factor.xiv Interaction is the change that results from

the simultaneous movement of two variables (e.g.,

consumption and production recipe)--an effect that

cannot be cleanly attributed to one variable or the

other. As a result, the interactive factor tends to

increase in direct relation to the gap between data

points and the volatility of the time period being

spanned. The largest jump in the interactive factor in

this analysis occurs between 1972 and 1977-one of

the longest gaps and a period that includes the frost

oil price shock. The interactive factor should not be

confused with a residual that is an unexplained

remainder. The interactive effect is a real, identifiable factor, although it is intuitively difficult to

understand and even harder to explain. An example

might include the simultaneous decline in the

consumption of gasoline due to more efficient

automobiles (a consumption mix change) and the

fact that automobile manufacturers decreased the

energy intensity associated with a car’s production

recipe, by making them smaller and lighter by

substituting plastic for steel (production recipe).

This could generate an interaction effect between
12 ● Energy Use and the U.S. Economy

consumption and production recipe as they simultaneously move beyond the sum of the individual

parts. The interaction effect is discussed in greater

length in the appendix.

Energy Definitions

The analysis breaks the change in energy use

down into five energy types: coal, crude oil & gas,

refined petroleum, primary electricity, and utility

gas (see box B). To avoid the double counting that

would occur if both the coal used to make the

electricity and the electricity that was generated

from the coal were reported, the energy types are

reported in their primary form (oil wells, coal mines,

water power, and energy produced from nuclear

reactors) .22 As a result, some of the more common

energy types that are secondary forms of energy

(largely the product of some primary fuel), i.e.,

electricity, are difficult to track. The electricity that

is listed is primary electricity, which refers to

electricity produced by hydroelectric and nuclear

powerplants. When this is combined with coal use,

a rough proxy for all electricity is generated because

84 percent of all coal used in 1985 was consumed by

electric utilities.

THE OTA MODEL

Analytical Technique

This report makes use of an analytical technique

called input-output analysis which shows the dollar

value of inputs used by each industry in the economy

to generate their output in a particular year. Inputoutput data are used in a wide variety of models; the

model employed in this analysis is an open, static,

physical input-output model that includes data from

1963, 1%7, 1972, 1977, 1980, and 1982. This data

is augmented with energy use data from 1%3, 1967,

1972, 1977, 1980, 1982, and 1985 that shows how

each industry uses energy in Btu for five energy

types: coal, crude oil & gas, refried petroleum

products, primary electricity, and utility gas. The

strengths and weaknesses of the model are outlined

in box C. The appendix describes the data sources,

methodology, and technical aspects in greater detail.

Input-output and energy use data by industry are not

currently available after 1985, limiting the 1985 to

1988 analysis of energy use to less detailed sources.

Box B—Energy Types

Primary energy: Primary energy is energy in its

most basic form, prior to any additional

processing or conversion. To avoid doublecounting, only energy from primary sources such

as coal, crude petroleum, water power, or nuclear

power is counted towards total energy consumption.

Coal: The definition of coal includes bituminous,

anthracite, lignite, coke, breeze, and coke oven

byproducts, except coke-oven gas.

Crude oil & gas: This category includes crude

petroleum, natural gas sold by the crude

petroleum and natural gas industry to gas

utilities, and the following natural gas liquids:

isopentane, natural gasoline, and plant condensate.

Refined petroleum: Refined petroleum includes

refined petroleum products and all natural gas

liquids other than those listed under the crude

petroleum and natural gas category.

Primary electricity: Primary electricity refers to

electricity that is not derived from a fuel such as

coal, oil, or natural gas. Electricity from such as

source would be a secondary form of energy.

primary electricity is instead produced from

natural sources such as uranium (nuclear power),

water (hydroelectric), steam (geothermal), wind,

or the sun (solar or photovoltaic), which are not

considered fuels.

Utility gas: Utility gas includes natural gas sold to

final consumers, manufactured gas, substitute

natural gas, coke oven gas, and all other gases.

SOURCE: S. Casler, “Energy Flows Through the U.S. Economy, 1980, 1982, and 1985,” contractor report

prepared for the Office of Technology Assessment,

Energy and Materials Program December 1989, p. 6.

Basis for Comparison

Because the emphasis of the analysis is on how

the use of energy changed between 1972 and 1985,

most of the data is presented as the difference in

energy use. But in many instances, the significance

associated with change depends on the size of the

base from which the change occurred. Figure 4

shows the base energy use for each year by fuel type.

Coal and primary electricity have increased in use

while crude oil & gas, refined petroleum, and utility

gas have all declined. As of 1985, roughly 24 percent

of all energy used was coal, 55 percent was crude oil
Part II-Analytical Structure ● 13

Box C—The OTA Energy Model

This report is based on a series of open, static, input-output models that have been modified to show energy

use by quantity (Btu) rather than value (dollars) for every sector of the economy for 1963, 1%7, 1972, 1977, 1980,

1982, and 1985. (A more complete description of the data, methodology, and limits and strengths of the model is

contained in the appendix.)

Strengths

●

●

●

●

•

The-model covers the whole economy—including services, not just the manufacturing or goods-producing

sectors.

Input-output analysis has the unique feature of being able to trace the effect of a particular industry’s output back

through its suppliers, and the companies that supplied its suppliers, all the way to the raw material processors.

This characteristic is particularly well-suited to the analysis of a fundamental input such as energy. This feature

allows the separation of the direct use of energy from the indirect use. For example, buying electricity to run an

automobile assembly line would be a direct use of energy while the use of steel used to make a car is an indirect

use of energy because of the energy embodied in the steel used to make the car.

The design of input-output tables allows the researcher to look beneath broad variables such as “technological”

or ‘structural’ change to see what factors caused these changes such as shifts in final consumption by consumers

or intermediate use of an input by businesses.

The creation of a mixed units (“hybrid”) input-output table means that the each sector’s unique price paid

(implicit price) for energy is reflected rather than relying on an average price that can mask individual changes.

Because they play a pivotal role in the GNP accounting system, input-output tables are compatible with many

other economic data series such as the National Income and Product Accounts.

Weaknesses

●

●

●

●

●

Input-output tables require extensive data for their construction. This data intensiveness results in a long time-lag

between the collection of the data and its release in a published form. As a result, the 1985 endpoint used in this

analysis is not an official Department of Commerce input-output table, but has been created by updating a 1982

table to 1985 levels using estimates of industrial output from a separate source. l The lack of any post-1985 data

that conforms to this framework prevents the analysis from looking in detail at the changes that occurred from

1985 to 1988.

The data intensiveness and availability of input-output tables make annual data points impracticable. This

weakens the analysis because the data that is available might miss possible turning points or be subject to

peculiarities of a particular year such as a recession.

The mathematics of input-output analysis includes a number of assumptions that place limits on the interpretation

of some results. Foremost among these is the assumption of “linear” or fixed input requirements. Calculations

that estimate the energy associated with a product assume that the mix of inputs, the process employed, and the

relative prices of goods and services are the same for making 1 product as they are for making 10,000.

The input-output tables used in this model are in constant dollars so that a sector’s relative rank in the economy

can be attributed to true gains, not just inflation. The elimination of price changes, however, excludes any analysis

of how prices affected energy use. In this respect, the effect of prices is not explicit, but is instead a hidden and

contributing element to observed factors such as energy efficiency and structural change.2

Input-output tables are designed to generate the output needed to satisfy the demand for goods and services for

a particular year. Technological changes, or for our purposes energy efficiency gains, are represented by changes

that occur in how industries decide to create that output. This definition of energy efficiency ignores any

efficiency gains made outside of industry such as the purchase of more fuel-efficient cars or adding more

insulation to houses. These changes in energy use would be captured in a category that looks at the changing mix

of products consumed. Since only a small portion of energy is directly purchased by consumers and an effort is

made to separate changes in energy consumption by consumers from other products consumed, this assumption

is not severely limiting, but can be a source of confusion.
14 ● Energy Use and the U.S. Economy

Figure 4--U.S. Energy Use by Type

80

t

60 I

40

20

0

1963 1967 1972 1977 1980 1982 1985

D Coa l = Crude oil and gas = Refined petroleum

S Primary electricity El Utility gas — Total consumption

U.S. energy use increased from 49.7 quadrillion Btu in 1983 to

72.5 quads in 1972 to a high of 78.2 quads in 1977. Energy use

dropped from the 1977 level to 74.9 quads in 1985. From 1972 to

1985, the use of crude oil & natural gas, refined petroleum, and

utility gas declined while use of coal and primary energy (mainly

nuclear and hydroelectric power) increased. By 1985, roughly 24

percent of all energy used was coal, 55 percent was crude oil &

natural gas, 7 percent was refined petroleum, 10 was primary

electricity, and 4 percent was utility gas.

SOURCE: Office of Technology Assessment, 1990.

& gas, 7 percent was refined petroleum, 10 was

primary electricity, and 4 percent was utility gas.

Correspondence to Conventional Categories

The structure of the OTA energy model forces a

division between consumers’ use of energy as a final

product and businesses’ use of energy as an intermediate input into their production processes. As a

result, there is not an exact correspondence between

the conventional categories of energy use—

residential and commercial, industrial, and transportation-and those used in this analysis. Box D

makes a rough comparison between the two classification schemes.

ENDNOTES FOR PART II
Part II--Analytical Structure ● 15

Box D-Correspondence Between Conventional Energy Categories

and OTA Energy Model Categories

The Department of Energy’s Energy Information Agency (EIA) maintains energy-use figures by three broad

sectors: industry, transportation, and residential and commercial These categories form the basis of much of the

analysis conducted on energy use and also form the conceptual framework many people use to think about and

discuss changes in energy use. The categories used in this report represent a departure from this convention, but a

rough correspondence can be achieved between these categories and OTA product groups.

Residential and commercial—EIA combines all the energy used by the residential (households) and

commercial (non-manufacturing business establishments) sectors where commercial is defined to include the

government. Most of this energy is used for heating, cooling, and lighting. The residential and the government

portion of the commercial sector are reflected in the OTA model category of spending on energy products. Energy

use associated with the nongovernment part of the commercial sector would be split between spending on services

and the use of services as an intermediate input in the production recipe.

Transportation—EIA includes all type of transportation, both commercial and private, in its definition of

transportation. The OTA model would count expenditures on gasoline for a car as spending on energy products.

Only personal or government spending on transportation services such as air travel or rail would be allocated as

spending on transportation services. Business expenditures on transportation such as hiring a trucking firm would

show up as use of transportation services within the production recipe.

Industry-EIA’s industry classification includes what is classified in the OTA model as spending on

manufactured and natural resource products and uses of energy, natural resources, and manufactured products

within the production recipe.

Although drawing an exact correspondence between the two classification schemes is difficult, each has its

own advantages. The advantages of the OTA scheme is a greater level of detail, a separation of commercial from

residential, a breakdown of industry into its parts, and a general separation of intermediate business use of energy

from final use by consumers. The disadvantage of the OTA system is that a direct connection to a specific end-use

such as personal energy expenditures on energy for transportation is not provided.
Part III

Recent Changes in Energy Use

TRACING THE CHANGE IN

ENERGY USE

Broad Changes Associated With Spending

and Production Recipe

The continued growth of the economy without a

corresponding increase in energy use in the 1970s

and early 1980s was due to three broad factors:

spending, production recipe, and the interaction of

changes in spending and production recipe. Figure 5

shows the change in energy use from 1963 and

illustrates how these three factors combined to push

energy use up from 1963 to 1972, reduce the rate of

growth from 1972 to 1977, and cause a leveling of

energy use between 1977 and 1985.

Changes in spending have increased energy use,

with the magnitude of its effect growing in every

year, except for 1982—a severe recession year. Over

time, the size of the U.S. economy, reflected by the

overall amount of spending, has increased along

with increases in population, motor vehicles, and

homes—leading to an increase in energy requirements. If more people buy more things-everything

else being equal-more energy will be used.

Figure 5-Changes in U.S. Energy Consumption,

1963-85 -

40

30

20

10

0

-10

The solid line shows that U.S. energy use increased by nearly 30

quadrillion Btu (quads) from 1963 to 1977 and then declined so

that by 1985 energy use had increased by 25 quads from 1963.

Spending (and the interaction between spending and production

recipe) caused energy use to increase in every year. This increase

was offset by changes in the way products were made-the

production recipe. in every year except 1972, changes in the

production recipe caused a decrease in energy use relative to

1963.

SOURCE: Office of Technology Assessment, 1990.

.-

The effect of production recipe changes on energy

use, excluding any changes in spending, has been

less constant. In 1967, production recipe played a

relatively minor role, exerting a small downward

influence on the increase in energy used since 1963.

By 1972, the effect of the production recipe had a

positive sign—more energy was required to produce

a set level and mix of products in 1972 than it took

in 1963, probably a reflection of the low, real price

of energy in 1972.23 The impact of changes in

production recipe on energy use flipped back to a

negative sign in 1977, most likely the results of the

first oil shock in 1974. From 1977 on, the downward

effect of production recipe on energy use continued

to grow until, in 1985, the decrease in energy use due

to production recipe was able to counterbalance the

increase due to spending. The methods and processes used to produce a set level and mix of output

had changed so that it required less energy to

produce the output in 1985 than it did in 1972. When

the changes in energy use attributable to spending,

production recipe, and the interaction of the two are

combined, the factors largely offset one other,

resulting in a very small increase (2 quadrillion

British thermal units (Btu)) from 1972 to 1985 (see

figure 6).

Figure 6-Changes in U.S. Energy Consumption,

1972-85

Quadrillion Btu

30 (--’- - I

20

10

0

-10

-20

I

–1 l –
18 ● Energy Use and the U.S. Economy

Fuels

In terms of fuel use, the 1972-85 change in energy

consumption resulted in a nearly equal increase in

the use of coal and primary electricity, balanced off

by a relatively large decrease in crude oil& gas and

a smaller decline in the use of refined petroleum (see

table 2). Changes in spending caused an increase in

the use of coal, crude oil & gas, and primary

electricity while changes in the recipe of production

caused a large decrease in the use of crude oil & gas

while generating a slight increase in the use of

primary electricity over the period. This increase in

the use of electricity could be due to offsetting

factors. For example, as a business increases its use

of electricity for new technologies, such as computers, and new processes, such as the electric-arc

furnace steel making, savings are also achieved as

electricity-saving technologies, such as sensors and

controls, are adopted.

The difference in energy use by fuel type is also

indicative of the different qualities inherent in the

various energy types. Decreasing the use of oil and

gas is usually easier because these fuels tend to be

used for the production of heat, which can be

recovered and reduced more readily than electricity,

which is used not only to produce heat, but also for

motor drive, electrolytic reactions, and production

control, to name a few.24 The aggregate term,

energy, should not be thought of as a fungible

commodity but rather as a heterogeneous collection

of energy types that have had a much different

experience in the 1972-85 period.25

Changes Associated With Spending: Level and

Mix, Product Groups, and Source

Each of the variables discussed above can be

broken into freer components that provide a greater

understanding of how the economy interacts with

energy use. These different perspectives shed light

on whether the increase due to spending was simply

due to buying more products or a different mix of

products. Was the increase due to increased use of

energy as an end product, such as oil for our homes

or gasoline for our cars, or was it indirectly

consumed through the purchases of nonenergy

products that embodied energy? If it increased

through indirect consumption, what type of product

was it that boosted the consumption? Lastly, where

is this increase in direct and/or indirect consumption

Table 2-Changes in Primary Energy Use From 1972

to 1985 by Energy Type Due to Major Factors

(quadrillion Btu)

Production

Spending recipe Interaction Total

coal . . . . . . . . . . . . . . . . 3.7 1.0 0.2 4.9

Crude oil & gas . . . . . . 7.4 –19.2 6.1 -5.7

Refined petroleum . . . . –1.3 -0.5 0.2 -1.6

Primary electricity . . . . 3.9 0.2 0.1 4.1

Utility gas . . . . . . . . . . . 0.7 -1.1 0.6 0.2

Total . . . . . . . . . . . . . 14.4 –19.5 7.1 1.9

Energy use increased by 1.9 quads from 1972 to 1985. This was

due to offsetting factors where spending caused a 14.4-quad

increase, the interactive terms led to a 7.1-quad increase, and

changes in the production recipe resulted in a 19.5-quad decrease. The use of both coal and primary electricity increased,

reflective of increases in the use of electricity. Most of these gains

emanated from changes in spending. Changes in the production

recipe caused the use of crude oil and gas and refined petroleum

to fall.

NOTE: Total may not add due to rounding.

SOURCE: Office of Technology Assessment, 1990.

coming from-households, the government, or international trade?

If we want to understand how the different facets

of the economy interact with energy use, it is

important to answer these questions. For example,

policies designed to affect household energy use

(e.g., incentives to insulate) are different than

policies that address reducing the dependence on

foreign energy supplies (e.g., duties on imported

oil).

Level and Mix

Spending can be split into two components:

. a change in the size or level of spending, where

simply more of everything is purchased; and

● the changing mix of what is being bought.

If a consumer simply buys more of everything,

keeping the proportions of spending the same across

all products purchased, all energy changes will be

attributable to an increase in the level of spending—

no change in mix has occurred. But if more is being

purchased and the mix of what is being bought shifts,

the change in energy use is attributable to changes in

growth and mix. By holding one component constant while allowing the other to vary, the change in

the overall energy use associated with spending can

be broken up into level, mix, and an interactive

factor.
Part III--Recent Changes in Energy Use ● 19

From 1972 to 1985, the increase in energy use

associated with spending came both from the

increased level of spending and the interactive effect

generated between level and mix. Changes in the

mix of spending resulted in a decline in energy use

in every year examined, except for 1967 (see figure

7).26 AS the level of spending has grown, the mix of

what is being purchased has shifted to less energyintensive products, such as health care instead of

gasoline. If the mix had not shifted between 1972

and 1985, the United States would have used 8

percent more energy in 1985 than what was actually

used (see table 3).

As one would expect, the level of spending tends

to track business cycles; the fact that energy

associated with the mix of spending also tends to be

affected by economic swings is somewhat of a

surprise. In every year except 1967, the impact of

changing levels of spending on energy use has been

offset by changes in the mix of spending. In other

words, just as an up-tick in economic growth causes

an increase in energy use, it also frequently causes

a shift in what is bought. The mix of purchases

moved towards a less energy-intensive array of

products-causing the two factors, level and mix, to

partially cancel one another. Likewise, in the lean

economic years of 1980 and 1982, the increase in

Figure 7-Changes in U.S. Energy Consumption

Due to Spending, 1963-85

Quadrillion Btu

40

30

I

20

10

0

-10

-20 ~ 1 1 I 1 f 1 1 I

1963 1967 1972 1977 1980 1982 1985

Years

Overall spending can be broken down into two components: the

level of spending and the mix of what is purchased. Holding

changes in the production recipe constant, OTA estimates that the

level of spending would have caused energy use to increase in

every year from 1963 to 1985. The increase in energy use due to

a higher level of spending is mitigated by a changing mix of what

is purchased.

SOURCE: Office of Technology Assessment, 1990.

Table 3-Changes in Primary Energy Use From 1972

to 1985 by Energy Type Due to Spending

(quadrillion Btu)

lnterLevel Mix action Total

Coal . . . . . . . . . . . . . . . . 4.6 –2.4 1.5 3.7

Crude oil & gas . . . . . . 11.6 -4.2 0.1 7.4

Refined petroleum . . . . –1.2 –1.9 1.7 –1.3

Primary electricity . . . . 2.2 2.4 -0.8 3.9

Utility gas . . . . . . . . . . . 0.4 0.3 –0.0 0.7

Total . . . . . . . . . . . . . 17.7 -5.8 2.5 14.4

Holding changes in the production recipe constant, OTA estimates that changes in spending would have led to a 14.4-quad

increase in energy use from 1972 to 1985. All of this increase is

due to increases in the overall level of spending; the changing mix

of what was purchased led to a decrease in energy use. The

higher level of spending led to increased use in nearly every

energy type, but particularly crude oil & gas. By and large, shifts

in the mix of spending tempered these increase.

NOTE: Total may not add due to rounding.

SOURCE: Office of Ttinology Assessment, 1990.

energy use due to growth was reduced, but the mix

of products purchased became more energyintensive (see figure 8).

This suggests that as consumers are pinched by

tough economic times, their market basket of

products consumed shifts towards relatively more

energy-intensive products, probably basic necessities such as heating fuel or gas for cars. During

Figure 8-Changes in U.S. Energy Consumption

Due to Spending, 1972-85

Changes in overall spending (solid line), holding other factors

constant, would have caused energy use to increase by 14 quads

from 1972 to 1985. All of this increase was due to higher levels of

spending and an interactive term. The mix of spending (black box)

shifted so that less energy was used between 1972 and 1985. By

1985, the shift in the mix of what was bought had led to over a

5-quad decrease in energy use from 1972.

SOURCE: Office of Technology Assessment, 1990.
20 . Energy Use and the U.S. Economy

periods of relative prosperity, the mixture of purchases shifts back to a less energy-intensive collection of items of a more luxurious nature, such as

electronics, sporting events, or clothes.27 Definitive

conclusions cannot be drawn because of the sparseness of the data points. Nevertheless, the responsiveness of the mix of spending is indicative of a flexible

buying pattern that can reduce the change in energy

consumption by as much as 7 quads (1972 to 1977

change) or as little as 0.2 quads (1972 to 1982).

Fuels—Table 3 shows that about half of the

increase in energy use from 1972 to 1985 attributable to spending was in crude oil& gas, and that all

of this increase was due to an increase in the level of

spending. Most of the remaining increase was in coal

and primary electricity, both of which are indicative

of increased electricity use. If a shift in the mix of

what products were being bought had not occurred,

an even larger increase in the amount of crude oil&

gas would have occurred. This same relationship of

increased use due to growth in the level of spending

being tempered by a shift in the mix of what was

purchased also occurred in the use of coal. The major

exception to this pattern was in the use of primary

electricity, which was boosted almost equally by

increases attributable to changes in the level and mix

of products consumed. Thus, the overall trend that

associates a shifting mix of products consumed with

a decrease in energy use does not apply to primary

electricity.

The tilt in the mix of products purchased towards

less energy-intensive goods and services is reflective of a whole group of events that occurred

between 1972 and 1985: income growth,28 demographic change,29 new government regulations,30

changing prices,31 the end of the Vietnam War,32 and

technological innovations,33 to name a few. The fuel

economy of new passenger cars nearly doubled over

this period. Consumers turned down their thermostats. Purchases of energy-intensive products like

automobiles, stoves, and washers and energyintensive infrastructure such as roads and factories

hit saturation points, limiting the market for these

items mainly to replacement.34 As expenditures on

energy products and energy-intensive goods drop,

money is left to be spent on products that are less

energy-intensive. The next section explores this

further by breaking spending into five broad groups

of products and tracing how changes in spending on

each group affected energy use.

Product Groups35

The influence of spending on energy use becomes

less abstract when spending is broken down into

tangible goods and services that can be purchased. In

this study, spending was broken into five broad

groups-energy, natural resources,xv manufacturing, transportation services,xvi and services. (See

table 17 in part V for a listing of the products that

make up each group.) This separation of purchases

of energy products from other products allows

exploration of the question of how much of the

increase in energy use due to spending was caused

by direct purchases of energy and how much of the

increase was the result of indirect uses of energy as

consumers buy products like food or clothing that

embody energy. In some cases, the division between

direct and indirect is a result of whether or not the

“amenity” being acquired is obtained within the

formal market place or outside of the market (e.g.,

self-service). For example, the fuel purchased for

personal travel would be counted as an energy

product, a direct use of energy, while the energy

associated with spending on air travel (a transportation service) would be an indirect use of energy.

Direct purchases of energy products by final

consumers have been constant or falling since 1977

(see figure 9). Only 1.1 quads of the overall 1972-85

total 14.4-quad increase in energy use due to

spending came from direct demand for energy

products. This would not seem to be small if the

share of the increase was commensurate with the

share of the overall base the product held in 1972.

But for the energy product group, this increase

translates into a disproportionately low 8 percent

share of the 1972-85 increase, since energy products

represented 48 percent of the energy associated with

1972 spending (figure 10). The energy product

group was the only group to substantially lose share

over this period.

The engine behind the growth in energy use due

to spending was the indirect use of energy associated
Part III--Recent Changes in Energy Use ● 21

Figure 9-Changes in U.S. Energy Use

Due to Spending on Different Product Groups

1 I

I

60

40

20

0 I 1963 1967 1972 1977 1980 1982 1986

energy. Table 4 shows that of the change that

occurred between 1972 and 1985 because of spending, services were responsible for 43 percent of the

increase in coal use, 44 percent of crude oil& gas,36

and 28 percent of the increase in primary electricity.

Presumably, these increases are tied to increases in

overall commercial space and the requisite heating,

cooling, and lighting needs associated with the

increasing size of the service sector. Changes in

spending on manufactured goods caused an increase

in the use of coal and crude oil & gas and a small

increase in primary electricity. Within the energy

product category, consumers moved towards electricity and away from refined petroleum. Consumers

preferences of energy consumed as a final product

shifted away from refined petroleum during the

period and towards electricity.

Sources of Demand

Consumers of final products area heterogeneous

group, composed of households, Federal, State, and

local governments, businesses,xvii and international

tcade. xviii The overall consumption of a particular

product is calculated by summing the expenditures

made on that product from each of these sources. But

spending by each source depends on widely differing factors. For example, household expenditures

are affected by changes in wages, governments

depend on taxes, businesses rely on revenues, while

foreign trade is influenced by fluctuations in the

value of currencies. The policy levers that affect

each group are also very different. Given these

differences, it is important to isolate how each

group’s demand for energy, both direct and indirect,

contributed to the increase in energy use due to

spending.

Households and Government —Figure 11 shows

how energy use would have changed as a result of

changes in spending from households (personal

consumer expenditures) and government, which

together constitute 85 percent of the 1985 GNP.

Direct personal consumer expenditures on energy

rose steadily from 1%3 to 1977 and then leveled-off,

while the indirect use of energy associated with

purchases of nonenergy products steadily grew from

1963 to 1985. By 1985, households indirect energy

use was nearly as large as the energy directly
22 . Energy Use and the U.S. Economy

Figure 10-Energy Use and Changes in Energy Use Associated With Spending by Product Groups

Energy use associated with 1972 Energy use associated with 1985

spending by product groups spending by product groups

Natural resourc

11%

Energy

48%

/

Services

17%

~ Transportatio n

Manufacturing 4%

20%

Natural resources

12%

Change in energy use from 1972 to 1985

due to changes in spending by

product group

/

Manufacturing

27%

/

Energy

40%

Services

22%

I resources

16%

Energy

8%

~ Transportatio n

Manufacturing

21% 4%

Direct spending on energy products represented 48 percent of all the energy use associated with spending in 1972. Energy use associated

with spending on services showed the largest gain in share, jumping from 17 percent in 1972 to 22 percent in 1985. When the 1972-85

change in energy use due to spending is broken into product groups, it becomes evident that direct spending on energy was responsible

for only 8 percent of the gain while spending on services resulted in 45 percent of the increase.

NOTE: Although spending was allowed to change, the way the products were made (the production recipe) was held constant at its 1985 form.

SOURCE: Office of Technology Assessment, 1990.

‘consumed. To some degree this growth in energy

associated with nonenergy products is a result of

sheer growth in the consumer sector and more

generally the economy. Nonetheless, this growth did

not affect household purchases of energy. The bulk

of the 1972-85 increase in energy use due to

spending came from the household sector where

indirect energy use grew three times as fast as direct

household demand for energy (see table 5). Most of

this indirect energy use was in the form of coal and

crude oil & gas. Primary electricity was the only

energy type whose growth was balanced between

direct energy demands and indirect energy demands

during this period.

The indirect use of energy is even more apparent

in government spending where the indirect use of

energy has always exceeded direct energy pur-
Part III--Recent Changes in Energy Use ● 23

Table 4-Changes in Primary Energy Use From 1972 to 1985 by Energy Type Due to Spending on Different Products

(quadrillion Btu)

Natural Transportation

Energy resources Manufacturing services Services Total

Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 0.5 1.0 0.0 1.6 3.7

crude oil & gas . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 1.3 1.8 0.5 3.3 7.4

Refined petroleum . . . . . . . . . . . . . . . . . . . . . . . . -1.6 0.1 0.1 0.0 0.1 –1.3

Primary . . . . . . . . . . . . . . . . . . . . . . . . 1.6 0.3 0.8 0.0 1.1 3.9

utility gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 0.1 0.2 0.0 0.2 0.7

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 2.3 3.9 0.7 6.4 14.4

Of the 14.4-quad increase in energy use due to spending from 1972 to 1985,6.4 quads came from increased purchases of service products

and 3.9 quads from purchases of manufactured goods. The build of these increases were in crude oil & gas.

30

25

20

15

10

s

o

products (exports) and domestic demand for foreign

products (imports).

Tracking the effect of trade on energy use through

the U.S. economy is a difficult task, complicated

further by the fact that conventional energy use

accounting does not reflect the indirect energy

embodied in nonenergy imports. Obviously, accounting for the energy used to produce every import

would be a herculean task, but a rough approximation of the energy that would have been used if that

imported product was produced domestically can be

estimated.38 By summing together this indirect

energy use associated with imports, the direct

imports of energy, and the use of domestically

produced energy, a more accurate picture of the U.S.

economy’s gross energy requirements emerge.xii

Without this correction, it would be easy to achieve

a decline in the economy’s energy use simply by

importing energy-intensive goods like steel or aluminum. Given that nonenergy imports have doubled

their share of GNP since 1970, the need to make this

distinction has grown in importance.39 Policies

designed to achieve reductions in a country’s

energy-intensity should be aware of the ability of

transnational companies to outsource components

from foreign affiliates, effectively circumventing

domestic policies.40 Box E provides an example of

this practice.

When this correcting adjustment is made, the

energy embodied in 1985 nonenergy imports boosts

the U.S. dependence on imported energy by over 50

percent from 13 quads to 20 (see figure 12).41 While

the indirect energy embodied in exports has stayed

relatively steady in the 1980s, the indirect energy
Table 5-Changes in Primary Energy Use From 1972 to 1985 by Energy Type Due to Sources of Spending

(broken Into direct and Indirect energy use) (quadrillion Btu)

Households

(PCE)

Direct Indirect

Coal . . . . . . . . . . 1.8 2.4

Crude oil & gas. -0.8 4.8

Refined petrol. . -0.1 0.2

Primary elec. . . . 1.5 1.6

Utility gas . . . . . 0.3 0.4

Total . . . . . . . 2.8 9.4

Government Exports

Direct Indirect Direct Indirect

-0.1 0.5 1.2 0.7

-1.1 1.2 1.3 1.4

-0.0 0.0 0.1 0.0

0.1 0.3 0.0 0.3

-0.0 0.1 0.0 0.1

–1.2 2.1 2.5 2.5

Imports’

Direct Indirect

-0.3 –1.2

-0.4 –1.8

0.1 -0.0

-0.1 -0.5

-0.0 -0.1

-0.8 –3.7

Other+

Direct Indirect

-1.1 0.8

-0.0 1.3

0.0 0.1

-0.1 0.5

-0.0 0.1

-1,2 2.8

Adjustments@

Export Import

direct direct

1.1 -0.1

0.4 -2.0

0.0 1.6

0.0 -0.1

0.0 0.1

1.6 -0.5

Total change in consumption

Direct Indirect Total

0.5 3.2 3.7

0.5 6.9 7.4

–1.6 0.3 -1.3

1.5 2.3 3.9

0.1 0.5

1.1 13.2 14.3
Part III--Recent Changes in Energy Use ● 25

embodied in imports has increased as our trade

deficit has deepened.42 To a large degree, the gains

the United States has achieved in reducing its direct

imports of energy have been offset by the indirect

energy use associated with nonenergy imports.

Instead of a 39 percent drop in the use of imported

energy from 1977 to 1985, the decline is reduced to

21 percent when the indirect energy embodied in

imports is included. The lack of post-1985 data may

skew this picture since the trade balance has

improved as exports have increased with the decline

in the value of the dollar, and increases in the level

of imports have been more modest.43

Given the fact U.S. citizens do not consume U.S.

exports, some analysts argue that calculations including the energy embodied in imports should be

net of the direct and indirect energy associated with

exports, failing to do so biases estimates of U.S.

energy use upwards. 44 The net trade line in figure 12

reflects this calculation. From 1977 to 1982, the net

trade balance of energy, including both direct and

indirect energy, was improving. This improvement

was due to reductions in the level of direct imports

of energy and a balance between the indirect energy

associated with imports and exports. After 1982, the

net trade line (figure 12) began to fall. This

turnaround was not due to increased direct imports

of energy—they stayed roughly constant over this

time period. The cause of the decline was an increase

in the indirect imports of energy. Not surprisingly,

this deficit mirrors the current account trade balance

(dollars), which went from a surplus of $26 billion

in 1982 to a deficit of $104 billion in 1985.45

To a large degree, the decision as to which

measure, net energy trade or gross, to use depends on

the questions being addressed. If the issue is how the

world’s energy use is divided by country, then a net

figure, subtracting out the energy embodied in

exports, is appropriate. But if the question is “how

dependent is the United States on foreign energy?”

or “what is the United States’ contribution to

greenhouse gases such as carbon dioxide?’ or “how

much energy does it take to operate the U.S.

economy?” then the gross energy use estimate is

better suited since it reflects the true energy requirements needed to satisfy all of the U.S. economy’s

consumers, which in a global economy are both

domestic and foreign.

Summary of Changes Due to Spending

Changes in spending would have led to an

increase in energy use of approximately 14.4 quads

from 1972 to 1985 if there had not been offsetting

factors. This 14.4-quad increase can be viewed from

21-544 O - 90 - 3 : QL 3
26 ● Energy Use and the U.S. Economy

20

10

0

- 1 0

- 2 0

- 3 0

Figure 12—Direct and Indirect Energy Use Associated With Imports and Exports

Quadrillion Btu

I

I

I

I I I I .- . . 1 I 1

The United States directly imports and exports energy. Although direct exports have stayed relatively steady, imports rose dramatically

between 1983 and 1977andthen declined from 1977 to 1985. The United States also uses energy indirectly in the form of energy embodied

in nonenergy exports (e.g., grain) and in imports (e.g., autos). Prior to the emergence of a trade deficit this indirect use of energy was in

balance, but by 1985 the indirect use of energy associated with imports boosted our dependence on foreign sources of energy by 50

percent.

SOURCE: Office of Technology Assessment, 1990.

three different angles: the level and mix of spending,

the type of products purchased, and the sources of

spending.

● All of the increase in energy use due to

spending from 1972 to 1985 was found to be ●

attributable to increases in the overall level of

spending. The economy simply required more

energy as the population increased, more

homes were constructed, more automobiles

were driven, and more output was produced

from the Nation’s industries. Nevertheless, the

shifting mix of what was being purchased

caused energy use to decline. Combining the

decrease in energy use associated with the

change in the mix of spending (–5.8 quads) ●

with the increase due to a higher, overall level

of spending (+17.7 quads) and the interaction

of the two effects (+2.5 quads), energy use due

to spending increased by 14.4 quads from 1972

to 1985.46

The 14.4-quad increase in energy use from

1972 to 1985 attributable to spending was

largely the result of indirect purchases of

energy embodied in products. Direct purchases

of energy were responsible for only 8 percent

(1.1 quads) of this increase. Purchases of

services (not including transportation services)

generated over 40 percent of the increase in

energy use due to spending between 1972 and

1985.

The source of this increase in energy use

attributable to spending came from the house-
Part III--Recent Changes in Energy Use ● 27

hold sector, which led in increases of energy

use, both directly and indirectly. The second

largest contributors to energy use were the

foreign trade sectors: exports and imports.

When the definition of energy consumption is

changed to include the indirect use of energy as

it is embodied in nonenergy imports, the U.S.

dependence on imported energy in 1985 increases by over 50 percent from 13 to 20 quads.

Examining how the spending of goods and

services affected energy use presents only half of the

energy dynamic that is occurring in the United

States. It ignores the energy use associated with how

these products were produced. Since nearly all of the

1972-85 change in energy use due to changes in

spending was due to the indirect use of energy

embedded in nonenergy products consumed, understanding how this energy is embodied in products

via the production process is essential to tracking

how energy use has changed.

Changes in Energy Use Associated

With the Production Recipe

Spending on goods and services triggers the

production of output as businesses try to satisfy this

demand. Whether it is something as mundane as the

gasoline in the car that delivers the pizza or as

sophisticated as the laser used in surgery, every

product requires some energy, directly or indirectly,

along the complex network that connects the extraction of raw materials with processing plants, assemblers, distributors, retailers, and ultimately the consumer. 47

The term production recipe refers to the ingredients and processes that are used to make a product

through this whole complex chain of activities that

might involve hundreds of individual businesses. In

terms of trying to track energy, the production recipe

has been split into two parts:

. the energy portion of the production recipe that

shows the use and manipulation of direct

energy inputs like coal, oil, gas, and electricity;

and,

● the nonenergy portion of the production recipe

which contains inputs such as steel, plastics,

advertising, and financial advice that indirectly

embody energy.

On a dollar-value basis, the direct use of energy

products in production recipes represent only about

a fifth of all inputs.48 The remaining four-fifths of

inputs, however, include significant amounts of

indirect energy use. As mentioned before, to produce

all of the cars sold in 1985 required relatively little

direct energy, about 0.23 quad, but 1.3 quads of

energy were indirectly used because the inputs into

a car (steel, rubber, glass, plastic) embody a lot of

energy. Changes in the nonenergy inputs (e.g.,

material substitution) of a production process indirectly affects energy use.

Estimates of the amount of energy associated with

changes in the production recipe requires that the

level and mix of spending be kept constant. Under

this experiment, any changes in energy use are

attributed to the production recipe or the interaction

of the production recipe with spending. Changes in

the production recipe can be examined in more detail

by breaking the production recipe into two broad

categories of inputs-energy and nonenergy—and

then selectively varying each component to see how

much of the change can be attributed to each factor.

Changes in energy use associated with changes in

the energy portion of the production recipe are

indicative of changes in energy efficiency: it requires fewer direct energy (Btu) inputs to make the

output needed to satisfy a constant set of demand.

Variations in the nonenergy portion of the production recipe are a partial reflection of the structural

change that is occurring in the United States as

technology, prices, and tastes increase the demand

for some inputs and slacken the demand for others.=

For example, as substitutes for steel are discovered,

such as high-strength polymers, the relative position

of the plastic industry will rise in the economy while

the steel industry declines.

As can be seen in figures 5 and 6, it has been

changes in the production recipe of the U.S. economy that have acted as the offset to the increased

energy use associated with spending. Holding the

effect of changes in spending constant, changes in

the production recipe from 1972 to 1985 reduced

energy use by almost 20 quads.

Energy Inputs

Both the energy and nonenergy components of the

production recipe changed so that U.S. industry used

less energy in 1985 than in 1963 to produce the same

‘The other component of structural change is a changing mix of spending.
28 ● Energy Use and the U.S. Economy

mix and level of products. Nevertheless, a majority

of the decline was attributable to changes in the

direct use of energy inputs, indicative of improvements in energy efficiency.

The trend towards steady gains in energy efficiency did not emerge until after 1972. Compared to

the energy efficiency of the 1963 production recipe,

the energy efficiency of 1967 improved significantly, only to have all the improvements eliminated

by 1972. In other words, the 1972 economy had the

same level of energy efficiency as the 1963 economy

(see figure 13). As mentioned before, this is probably due to the relatively low price of energy in 1972

compared to 1963.

After 1972, the economy’s energy efficiency

improved dramatically. Changes in the energy

portion of the production recipe led to a 15.4-quad

drop in energy use from 1972 to 1985 (see figure 14).

This change was responsible for over three-quarters

of the entire decline due to production recipe

changes from 1972 to 1985.49

In terms of fuel use, nearly all of the decline in

energy from 1972 to 1985 due to changes in energy

inputs occurred in crude oil& gas (see table 6). Coal

and, to a lesser extent, primary electricity were the

only energy types to experience an increase in use

because of changes in the energy portion of the

production recipes. The next section examines how

these changes are distributed across the different

sectors of the economy.

Changes by Sectors—Forty percent of the 1972

to 1985 drop in energy use due to changes in the use

of energy inputs came from the manufacturing sector

(see table 7). This change is disproportionately large

given that using a 1972 production recipe, manufacturing only used 27 percent of the total energy

required. Of the drop originating in the manufacturing sector, over 90 percent of it was due to decreased

use of crude oil & gas. Although few, if any,

manufacturing concerns directly use crude oil & gas,

the drop is a reflection of counting energy use in its

primary form where a decrease in the use of

secondary products like refined oil and natural gas

force decline in the primary energy source: crude oil

& gas. A number of technological advances and

process changes such as sensing and control systems,50 heat recovery systems,51 use of variable

speed motors,52 continuous casting of steel,53 and

the application of new membrane technologies for

the separation and purification of materials54 have

Figure 13-Changes in U.S. Energy Use Due to

Changes in Production Recipe, 1963-85

Quadrillion Btu

o ~

- 5 -

Direct

- 1 0 -

Changes in the production recipe (holding spending constant)

would have caused energy use to decline from 1963 in every year,

except 1987. These changes are broken into two parts, the energy

portion or direct energy savings (energy efficiency) which is

responsible for most of the change (dear box), and the nonenergy

portion or indirect savings (black box).

SOURCE: Office of Technology Assessment, 1990.

Figure 14-Changes in U.S. Energy Use Due to

Changes in Production Recipe, 1972-85

I

- 5

- 1 0

I

-15

-20

1

-25 L . 1 I 1 I

1972 1977 1980 1982 1985

Years

— Production recip e = Energy portion

- Nonenergy portion ~ Interaction

Between 1972 to 1985, changes in the production recipe caused

energy use to decrease by nearly 20 quads. Four-fifths of this

decline was due to energy-efficiency improvements or changes in

energy inputs of the production recipe (clear box). The remaining

fifth of the decline was due to nonenergy input changes (material

substitution) in the production recipe (black box).

SOURCE: Office of Technology Assessment, 1990.

improved the energy efficiency of manufacturing’s

production recipe.

The energy sector itself and the services sector

each contributed about 20 percent of the 15.4-quad

drop in energy use from 1972 to 1985, caused by

direct changes in the use of energy inputs (energy
Part III--Recent Changes in Energy Use .29

Table 6-Changes in Primary Energy Use From 1972

to 1985 by Energy Type Due to Production Recipe

Changes (quadrillion Btu)

Energy Nonenergy Interaction Total

Coal . . . . . . . . . . . . . . 2.5 -1.7 0.1 1.0

Crude oil & gas . . . . . -17.0 -1.6 -0.5 -19.1

Refined petroleum . . –0.4 -0.0 –0.0 -0.5

Primary electricity . . . 0.4 -0.3 0.1 0.2

Utility gas . . . . . . . . . . –0.9 -0.1 -0.0 –1.1

Total . . . . . . . . . . . –15.4 -3.7 -0.4 -19.5

Of the 19.5-quad decrease in energy use due to changes in the

production recipe, 15.4 quads were due to changes in the energy

portion of the production recipe (energy efficiency) and 3.7 were

due to nonenergy changes in the production recipe. Nearly all of

the energy efficiency changes occurred in the use of crude oil and

gas while the nonenergy changes in the production recipe were

more evenly spread across energy types.

NOTE: Total may not add due to rounding.

SOURCE: Office of Technology Assessment, 1990.

efficiency). As in the manufacturing sector, nearly

all of the decrease was in crude oil& gas. But unlike

the manufacturing sector, this change was not

disproportionately large given their 1972 consumption. The overall decline in energy use in the energy

and service sectors conceals increases in the use of

coal by both sectors and an increase in the use of

primary electricity by the service sector. The increased use of coal and the decrease in the use of oil

by the energy sector is reflective of fuel switching by

electric utilities that occurred during this period. The

percentage of the electricity generated from coal

jumped from 44 to 57 percent from 1972 to 1985,

while the share made from oil dropped from 16 to 4

percent.

55 The Department of Energy attributes over

80 percent of the decline in energy use by the

commercial (a proxy for services) sector to “nonenvelope” retrofits such as more efficient heating and

cooling systems or more efficient lighting.56

Increases in the use of primary electricity and coal

by the service sector is reflective of how the

production process in services has incorporated

more capital equipment,57 such as copiers, computers, scanners, and communication equipment that

require electric power.xxi The typical daytime electricity use associated with office machines in a

modern office building is as much as the electricity

required for lighting.58 Modern office equipment,

such as a laser printer, requires 5 to 10 times as much

electricity as an old impact printer; more powerful

desk-top computers, like the IBM AT, use almost

twice as much electricity as the previous generation

IBM PC.59

Nonenergy Inputs

Although less significant in magnitude than the

changes occurring in the energy portion of the

production recipe, the indirect energy savings associated with changes in nonenergy inputs have grown

in size and have reinforced the energy savings

gained from pure energy efficiency. By 1982,xxii

over a quarter of all the decline due to recipe changes

from 1972 to 1982 was caused by changes in

nonenergy inputs.

60 As figure 13 shows, prior to

1977, nonenergy input changes were actually increasing the amount of energy used by the economy

in comparison to a 1963 base.6l Since 1972, the drop

in energy use attributed to changes in the use of

nonenergy inputs has been relatively steady and

have grown in size (figure 14). It can be estimated

that if 1985 nonenergy input data were available, it

is likely that another 1.4-quad reduction in energy

use would have been achieved from 1982 to 1985.62

The types of energy indirectly affected by changes

in the nonenergy portion of the production recipe

differ significantly from those affected by direct

shifts in energy inputs (table 6). Changes in nonenergy inputs from 1972 to 1982 led to a decrease in

the use of coal, while coal increased under the

changes that occurred in energy inputs. Similarly,

primary electricity use declined under nonenergy

changes while it increased under changes in energy

inputs. Changes in nonenergy portion of the production recipe caused the use of each energy type to fall

between 1972 and 1985.

These declines are a result of the shifting mix of

nonenergy inputs in the production process. Less

energy-intensive inputs are being used relatively

more than energy-intensive inputs. For example, of

the inputs that registered a gain in share between

1972 to 1980, wholesale and retail trade was the

largest. Number two was business services. Both of

these inputs have relatively low energy intensities.
30 ● Energy Use and the US. Economy

Table 7-Changes in Primary Energy Use From 1972 to 1985 by Energy Type Due to Energy Production

Recipe Changes (quadrillion Btu)

Natural Transportation

Energy resources Manufacturing services Services Total

coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 0.4 0.1 0.0 1.0 2.5

Crude oil & gas . . . . . . . . . . . . . . . . . . . . . . . . . . -3.8 -3.0 -5.9 -0.4 -3.9 -17.0

Refined petroleum . . . . . . . . . . . . . . . . . . . . . . . . -0.1 –0.1 -0.1 -0.0 -0.1 -0.4

Primary electricity . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.1 -0.0 0.0 0.2 0.4

Utility gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.2 –0.1 -0.4 -0.0 -0.2 -0.9

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3.0 –2.7 -8.3 -0.4 -3.0 –15.4

Nearly half of the reduction in energy use due to changes in the energy portion of the production recipe occurred in the production of

manufactured goods where most of the decline was in the use of crude oil & gas.

NOTE: Total may not add due to rounding.

SOURCE: Office of Technology Assessment, 1990.

The input with the largest decline in share was

primary iron and steel, one of the most energyintensive industries.w Shipments of steel from U.S.

plants fell by 41 percent from 1972 to 1985.63 Since

the bulk of the coal not used by the electric utility

industry is used to make steel, a decline in domestic

production of this magnitude would have a large

indirect effect on the use of coal.

Changes by Sector

Nearly all of the indirect decreases in energy use

due to nonenergy changes in the production recipe

from 1972 to 1985 occurred in the manufacturing

sector (table 8). This decline primarily affected the

consumption of crude oil & gas and coal and to a

lessor extent the use of primary electricity.a Three

of the sectors-energy, transportation services, and

services-actually had nonenergy changes that led

to an increase in energy use from 1972 to 1985.

Combined, these increases in energy use caused a

slight (0.4 quad) increase in the use of crude oil &

gas.

Examples of how changes in the nonenergy

portion of the production recipe can decrease energy

use include the automobile industry, where lighter

materials such as high-strength plastics have been

substituted for metals. From the mid-1970s to the

mid- 1980s, the iron and steel content of a car fell by

30 percent while the amount of plastics and composites increased by 33 percent.G5 Automated manufacturing technologies such as computer-assisted design (CAD), which are becoming more commonplace in industries such as the motor vehicle

industry, allow products to be designed so that fewer

parts are required, reducing the amount of material

wasted and energy required for assembly. Fiat’s

recent investments in automation means that the Fiat

Uno has over a third fewer major parts, reducing the

number of welds required for assembly by 43

percent from the previous generation model, the Fiat

127.ti

Advances in information technologies have made

it possible to substitute information for materials,

leading to changes in the production recipe that

indirectly save energy. Instead of creating dozens of

prototypes, Levi Strauss is using computers to test

out new fabrics, patterns, and designs before ever

cutting a piece of cloth.G7 Ten years ago, four-fifths

of the value of a computer was embodied in its

hardware, the remainder being associated with

software. Today, these are ratios are reversed,

resulting in a drop in the energy associated with a

dollar’s worth of output.G8

Energy Intensities

The total amount of energy (direct and indirect)

associated with the complex chain of businesses that

interact to make a product (the production recipe) is

reflected in a product’s energy intensity. Generally,

a product’s energy intensity is the total amount of

direct and indirect energy (Btu) needed to generate

a dollar ’sxxiv worth of the product, except in the case

of energy products where the intensity is the amount

of energy (Btu) needed to make a Btu of output.G9

The analysis presented in the preceding sections

made use of each product’s energy intensity in

calculating energy use under different conditions.

By themselves, energy intensities are useful in

understanding how the energy associated with
NOTE: Total may not add due to rounding.

SOURCE: Office of Technology Assessment, 1990.

different products roughly compare, what the distribution of energy intensity across products looks like,

and where some of the biggest declines in energy

intensity have occurred.

Table 9 provides a listing of the energy intensities

for each of the 88 products that make up the

economy in our model for 1963, 1972, and 1985, and

the change in each product’s intensity iiom 1972 to

1985. The first five products are energy commodities where electricity stands out due to the fact that

it takes over 3 Btu inputs of energy for every Btu of

electricity output because of conversion losses.70

The most remarkable characteristic of the nonenergy products (no. 6 through no. 88) is the huge

range that is covered, extending from a high of

150,000 Btu per dollar of pavement (product no. 34)

to a low of 2,000 Btu per dollar of real estate services

(product no. 81) (figure 15). Exact comparisons of

each product’s energy-intensity is difficult because

the denominator in the ratio, gross output or

shipments, differs between products depending on

the amount and value of inputs. Since the value of

inputs are included in estimates of gross output,

double counting occurs. Thus, products that include.

a large number of purchased inputs, like automobiles, will have more of this double counting,

boosting the value of their shipments, as opposed to

products, such as hair styling, that have relatively

few inputs. These differences in output caution

against exact comparisons of product’s energy

intensity, but do not affect comparisons in a product’s energy intensity over time.

Nevertheless, some general comparisons for purposes of imparting a general sensitivity of which

products are energy-intensive and which are not, can

Figure l&Ranking of Primary Energy Intensity of

Selected Products

Btu (000) per constant dollar of output

160 I 1

120- ‘

100- “

60-

40- “------------------ -

20-

0 4 -

1

I 1 1 1 r 1 1 I ! 1 I

0 5 10 16 20 25 30 36 40 46 SO 65 60

Rank ordering of products

— 1986 ‘ -- -196 3

The energy intensity of a product is the direct and indirect energy

used to produoe a dollar’s worth of that product. When calculated

across all products and ranked, the distribution of these intensities

reveals that only a few products are extremely energy intensive

and that the bulk of the products have an energy intensity between

20,000 and 40,000 Btu per dollar of output.

SOURCE: Office of Technology Assessment, 1990.

be made. The most energy-intensive products are

paving, asphalt, chemical mineral mining, chemical

products, water transportation, primary iron and

steel manufacturing, plastics, and primary nonferrous metals manufacturing. Many of these products

use energy as a material input (feedstock) in addition

to using energy as a source of heat or power. In all,

only about 15 percent of the products had primary

energy intensities in excess of 40,000 Btu per dollar

of output and these products composed less than 9

percent of all 1985 output shipments.7

1 Because of

the uneven distribution of energy intensities, increased efficiency in a few industries or a realignment of the economy away from these energy-
32 ● Energy Use and the U.S. Economy

Table 9—Primary Energy Intensities by Commodity for Selected Years

1963 1972 1985 1972-85 chan~

(Btu input per Btu of output)

1 Coal mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.01

2 Crude petroleum and natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.06

3 Petroleum refining and related industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.19

4 Electric utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.81

5 Gas utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.17

(Btu per dollar of output)

6 Livestock and livestock products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,343

7 Other agricultural products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,304

8 Forestry and fishery products . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,370

9 Agricultural, forestry and fishery services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,007

10 Iron and ferroalloy ores mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,895

11 Nonferrous metal ores mining, except copper. . . . . . . . . . . . . . . . . . . . . . . . . . . 31,086

12 Stone and clay mining and quarrying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,613

13 Chemical and fertilizer mineral mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,822

14 New Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,430

15 Maintenance and repair construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,258

16 Ordnance and accessories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,911

17 Food and kindred products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,274

18 Tobacco manufacturers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,847

19 Broad and narrow fabrics, yarn, and thread mills. . . . . . . . . . . . . . . . . . . . . . . . . 48,708

20 Miscellaneous textile goods and floor coverings . . . . . . . . . . . . . . . . . . . . . . . . . 55,838

21 Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,402

22 Miscellaneous fabricated textile products.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,731

23 Lumber and wood products, except containers . . . . . . . . . . . . . . . . . . . . . . . . . . 19,472

24 Wood containers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,175

25 House hold furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,227

26 0therfurniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,666

27 Paper and ailied products, except containers . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,864

28 Paperboard containers and boxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,745

29 Printing and publishing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,925

30 Chemicals and selected chemical products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,958

31 Plastic materials and synthetic materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,533

32 Drugs, cleaning and toilet preparations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,727

33 Paints and allied products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,380

34 Paving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,689

35 Asphait . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138,490

36 Rubber and miscellaneous plastic products . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,767

37 Leather tanning and finishing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,802

38 Footwear and other leather products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,348

39 Glass and glass products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,774

40 Stone and clay products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,984

41 Primary iron and steel manufacturing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,990

42 Primary nonferrous metals manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,710

43 Metal containers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,568

44 Heating, plumbing, and structural metal products . . . . . . . . . . . . . . . . . . . . . . . . 37,478

45 Screw machine products and starnpings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,783

46 0ther fabricated metal products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,461

47 Engines and turbines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,768

48 Farm and garden machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,109

49 Construction and mining machinery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,480

50 Materials handling machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,936

51 Metal working machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,419

52 Special industry machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,749

53 General industrial machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,596

54 Miscellaneous machinery, except electrical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,864

55 Office, computing, and accounting machines . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,118

56 Service industry machines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,694

57 Electrical industrial equipment and apparatus . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,474

58 Household appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,745

59 Electric lighting and wiring equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,265

60 Radio, TV, and comrnunication equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,890

61 Electronic components and accessories.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,833

1.02

1.06

1.19

3.80

1.15

27,475

34,799

21,547

24,761

45,063

44,155

42,993

78,339

24,377

23,876

18,683

26,528

11,218

56,016

57,183

34,022

38,493

32,305

30,331

26,987

26,414

60,570

40,073

21,819

88,896

83,779

27,595

52,151

146,386

136,543

39,041

36,651

23,156

46,873

55,953

69,272

64,587

41,966

35,778

37,468

33,599

23,655

24,872

21,376

24,770

20,540

20,644

23,768

22,874

59,496

30,066

25,155

33,295

24,475

22,330

35,976

1.03

1.06

1.16

3.48

1.09

17,732

20,314

29,921

14,116

65,272

42,975

37,634

78,254

19,680

17,782

10,820

19,969

10,813

34,365

33,962

18,092

21,845

28,138

20,040

18,625

18,598

43,234

28,456

16,351

70,923

53,272

20,572

34,329

150,858

127,952

29,171

21,765

15,702

36,345

42,993

64,436

50,478

30,482

24,735

25,159

24,639

18,939

18,796

17,888

17,923

15,234

16,779

18,279

13,568

12,636

19,630

16,722

21,027

18,640

14,053

20,568
Table 9-Primary Energy Intensities by Commodity for Selected Years-Continued

1963 1972 1985 1972-85 change

Median energy intensity of non energy products, nos. 6 through 88.

26,216

31,788

14,922

29,579

21,647

35,975

23,657

37,908

31,323

18,714

81,532

49,560

38,591

12,342

12,630

6,945

30,969

12,323

9,576

5,874

12,460

11,622

10,504

9,707

10,100

7,026

17,769

26,265

27,229

28,182

15,456

26,664

21,477

25,551

25,130

36,754

21,914

21,432

79,994

49,100

24,881

4,498

7,357

10,738

18,417

13,440

8,513

4,627

16,230

9,882

14,622

13,998

12,390

10,636

19,065

26,528

18,171

18,889

12,460

17,393

14,444

18,192

17,547

25,732

21,891

26,932

65,485

44,807

24,473

7,724

6,325

8,154

41,901

12,948

6,661

2,432

13,264

6,162

14,208

10,492

11,603

7,138

15,889

18,939

SOURCE: Office of Technology Assessment, 1990.

intensive industries could have a dramatic effect on

the overall energy intensity of the economy.-

The least energy-intensive products tend to be

services such as real estate and rental, business

services, communications (except radio and television), finance and insurance, Federal Government,

transportation arrangements,72 radio and TV broadcasting, amusements, and medical services.73 Nevertheless, when the direct and indirect energy associated with a product is accounted for, some services

like water and sanitary services and water transportation are relatively energy-intensive, respectively consuming two and three times the median

energy intensity of all products.

The common factor among most products is the

nearly universal drop in energy intensities since

1972 (figure 15). Economy-wide, the median energy

intensity has fallen by 29 percent from 1972 to 1985

with most of the decline occurring within the

manufacturing sector where the median intensity fell

by 35 percent. The median energy intensity of the

transportation services sectorxxvi has stayed roughly

constant while the service sector has declined by 15

percent and natural resources fell by 19 percent.

The single largest decline in a product occurred in

the office, computing, and accounting machine

category. To some extent this decline is a vestige of

the deflation process used on output, which adjusts

the value of a good over time for inflation and

quality changes. This process allows a more accurate

comparison of the value of production over time

since changes in a product’s price are eliminated and

changes in the characteristics of a product are

accounted for. In this sense, the deflation process

attempts to convert the value of a product into a

quantity measurement. This is relatively easy for
34 ● Energy Use and the US. Economy

products like corn or steel, but is much more difficult

for products experiencing a rapid change in quality,

i.e., computers. Although somewhat arcane, the

importance of this deflation process to estimates of

constant dollar output should not be underestimated.

An example is provided in box F.

Significant declines in energy intensity were also

made in plastics, chemicals, textiles, paper, water

transportation, and primary ferrous and nonferrous

metals. The only significant increases in energy

intensity over the period involved iron and ferroalloy ore mining and water and sanitary services. The

jump in iron ore mining is probably connected to

increased use of energy for excavation, processing,

and transportation74 while the increase in water and

sanitary services is probably associated with expanded service and regulatory changes (the Safe

. Drinking Water Act and the Clean Water Act) that

led to increased use of the chemical treatment of

water.

Summary of Changes Due to the

Production Recipe

Between 1972 and 1985, changes in the process

by which the economy produced output to match a

fixed level and mix of spending, would have led to

a 19.5-quad decrease in energy consumption.

Collectively, these changes are referred to as

changes in the production recipe. When these

changes are broken down into energy and nonenergy

categories, roughly a fifth (19 percent) of this

decline can be attributed to changes occurring in the

nonenergy portion of the production recipe--

indirect energy savings. 75 the other four-ftiths (79

percent) of the decline was traced to changes in the

Box F—An Example of the Deflation Process: Computers

Because of tremendous recent advances made in computers such as more memory, faster speeds, and better

storage capabilities-all at lower costs- the output deflator for computers fell by a factor of 4 between 1972 and

1982 and then fell by nearly another factor of 2 between 1982 and 1985.1 These changes have a huge effect on output

when it is revalued into constant dollars.

This change in the deflator means that the type of a computer that cost $1,000 in 1972 would only cost $250

if purchased in 1982. Technology that was new and expensive in 1972 has been perfected by 1982 and costs much

less. Similarly, a computer which was purchased for $1,000 in 1985 would have cost $1949 if it was purchased in

1982. Features that are commonplace and standard in 1985 like a hard disk, commanded a premium in 1982. In other

words, even though the purchasing power of the dollar decline from 1982 to 1985 because of inflation, the nature

of the product was so improved that to have purchased a product of similar quality in 1982 would have required

almost twice the money.

Assuming for the moment that the energy required to produce that computer did not change over that time

period, that the level of output was fixed at one machine, and the price (nominal) of a computer in each year was

$2,000, but that a huge improvement in quality was sustained over the time period, the following table shows how

the energy intensity would have changed because of changes in the deflator.

1972 1982 1985

Product example IBM-PC2

IBM-XT IBM-AT

This example illustrates the fact that the deflation process alone reduces the energy intensity associated with

a computer by a factor of 8 between 1972 and 1985. Conceptually, this adjustment makes sense. For the same price

(or even less) and amount of energy inputs overtime, the consumer has gotten progressively more computer power.

Thus the real cost of a computer and the energy intensity of a computer has fallen.
Part III Accent Changes in Energy Use ● 35
36 ● Energy Use and the U.S. Economy

30

20

10

0

- 1 0

- 2 0

- 3 0

Figure I6--Changes in Energy Consumption, 1972-85

Quadrillion Btu

I I

I I I I I I

1972 1977 1980 1982 1985 Categories

The factors used to analyze the change in energy use-spending mix and level, the energy and nonenergy portions of the production

recipe, and the interactive terms can be rearranged so as to oonform to broader categories. The interaction terms can be aggregated into

one overall term and level of spending is synonymous with the level of economic growth (GDP). Both of these factors, holding other

variabies constant, caused energy use to increase from 1972 to 1985. Changes in the nonenergy portion of the production recipe and shifts

in the mix of spending can be labeled structural ohanges in the eoonomy and they ied to about a third of the decline in energy use. The

remaining two-thirds of the dedine was due to energy-efficiency improvements or changes in the energy portion of the production recipe.

SOURCE: Office of Technology Assessment, 1990.
R
Part 111 Recent Changes in Energy Use . 39
38 ● Energy Use and the U.S. Economy
Part IV

Energy Use in the Recent Past and in the Future

Using the framework established in part III, part

IV analyzes the recent increase in energy use

registered from 1985 to 1988 and speculates about

likely changes in energy use from 1988 to 2000.

OVERVIEW

The trend of constant energy use established from

1972 to 1985 was broken between 1985 and 1988

when energy use increased by 8 percent (6 quadrillion British thermal units (Btu) or quads.) Although

the energy intensity of the economy continued to

decline nom 1986 to 1988, it did so at a meager-O.2

annual rate as opposed to the –2.4 percent decline

achieved from 1972 to 1985. The lack of detailed

data preclude answering the question of what factors

caused this increase, but it appears that an increase

in the level of spending coupled with a shift in the

mix of consumption towards more energy-intensive

products contributed to the increase:

● Of the 10 major sectors of the economy,

manufacturing increased its share of total

shipments the most from 1985 to 1988, growing from 32.9 percent of all shipments to 33.8.

This increase in the economy’s share of gross

output halted a downward trend that had

prevailed since 1972.

This shift in output is reflective of a shift in the

mix

●

●

●

of spending:

Federal Governrnent spending took a dramatic

change as nondefense purchases fell by 16

percent over the 3-year period and defense

purchases grew by 10 percent.

The export sector experienced the fastest rate of

growth of any sector during this period, increasing its share of Gross National Product

(GNP) from 10 to 13 percent. Contributing to

this surge were energy-intensive manufacturing products like aluminum where exports grew

by 44 percent and steel mill products where

exports increased by 121 percent horn 1985 to

1988.

Household spending shifted away from nondurable to durable goods like furniture and

home electronics.

Although the level and mix of consumption

changed between 1985 and 1988 in such a way that

energy use increased, reversing the trend set in the

1972-85 period, it does not appear that the energy

efficiency of the production processes used to make

these products declined over the period:

●

●

●

It

and

Although the economy was experiencing rapid

growth that could theoretically have led to

inefficiencies as plant capacity was stretched

thin, the level of capacity utilization from 1985

to 1988 was lower than that achieved from 1978

to 1980-a period marked by industrial energyefflciency gains.

The annual rate of investment in new plant and

equipment from 1985 to 1988 was 7 percent, 2

percentage points higher than the 1972-85

annual investment rate. It is likely that these

new investments improved energy efficiency.

The cost of energy did decline significantly

horn 1985 to 1988, providing an incentive to

ease-up on pursuing energy efficiencies in

production processes. But energy efficiencies

have been sustained in other periods of falling

prices such as horn 1958 to 1971 and 1982 to

1985—although the magnitude of the decline

was not as large as that between 1985 and

1988. 82 Nevertheless, low energy prices do not

preclude new investments in production process that are being adopted for reasons other that

energy efficiency (e.g., higher product quality,

increased production flexibility, or lower labor

costs) but have the unintended benefit of

reducing energy use.83

appears that increases in the level of spending

changes in the mix of what was being bought

from 1985 to 1988 caused a realignment of industrial

output towards relatively energy-intensive industries, in turn causing an increase in energy use.

Predictions about how energy use and the economy are likely to change in the future are based on

a model developed by the U.S. Department of

Labor’s Bureau of Labor Statistics. The “moderategrowth’ ‘ scenario of this model has the GNP

growing at a slower rate in the next 12 years than

what occurred in the past 12. Thus, on the basis of

sheer growth alone, the increase in energy use

should be less in the future than that experienced

between 1976 and 1988.

In terms of energy use associated with changes in

the composition of output, i.e., structural change, the

picture is mixed. The manufacturing sector is

--41–
42 ● Energy Use and the U.S. Economy

predicted to benefit horn increases in exports, while

being hurt by decreases in defense spending.” All

told, manufacturing’s share of output is predicted to

increase, but much of the growth is in ‘‘high-tech”

products that have relatively low energy intensities.

When viewed across all sectors, changes in energy

use associated with changes in the structure of the

economy, do not appear to be significant.

The future impact of technology on energy use is

even more speculative. Nevertheless, a wide array of

energy-saving technologies are already in the market

and hold out the potential for significant gains in

efficiency. The critical unknowns of the future are

less of technical potentials than the willingness to

implement the technology.

CHANGES IN ENERGY USE

FROM 1985 TO 1988

The 13-year trend of steady decreases in the

number of Btu consumed per dollar of Gross

Domestic Product (GDP) produced (figure 1) was

broken between 1985 to 1988 as energy use increased by 8 percent (6.1 quads) in 3 years.85 Over

half of this increase was in petroleum; a fifth was in

the form of coal.8G The increase was distributed

across all three of the main sectors that the Department of Energy allocates energy use to:

● residentia1/comrnercial was responsible for 37

percent of the increase,

● industrial uses contributed 32 percent of the

increase, and

. transportation provided 30 percent.87

Even though an increase of 6 quads in 3 years is

a significant departure horn the flat level of energy

use established between 1972 and 1985, the intensity (energy used per dollar of GDP) continued to fall

because of the fast pace of real GDP growth (11

percent increase from 1985 to 1988).88 Nevertheless,

the pace of the decline in energy intensity has fallen

from -2.4 percent per year horn 1972 to 1985 to-O.8

percent per year from 1985 to 1988.89 From 1986 to

1988, the decline in energy intensity almost came to

a halt, falling at 0.2 percent per year. Why has the

rate of decline in energy intensity leveled off after 13

years of steady decreases? Has the rate of energyefficiency improvements declined? Or has the structure of the economy shifted towards a more energyintensive mix of industries?

Detailed data, in particular an up-to-date inputoutput table and industry-specific energy use data,

are unavailable, precluding an analysis like that

conducted in part III. Nevertheless, some hints as to

why energy use increased can be obtained from the

more limited data that are available.w The analytical

framework established in part III suggests four

possible factors that could have contributed to the

increase:

growth in the overall level of spending;

a changing mix of spending towards energyintensive products;

changes in the nonenergy portion of the production recipe, requiring more energy; and/or

changes in the energy portion of the production

recipe, that have induced inefficiencies in the

use of energy.

Changes in the mix of spending and in the

nonenergy portion of the production recipe are

collectively labeled structural changes, while

changes in energy use due to changes in the energy

portion of the production recipe are referred to as

changes in technology or energy efficiency.

Growth

The 1985-88 period was a time of strong economic growth: real GDP grew at an annual average

rate of 3.7 percent, v. 2.5 percent for the 1972-85

period. 91 As shown in part III, sheer growth or an

increased level of spending, holding all other

changes constant, does increase the use of energy.

Finding a period in the past to act as a proxy for 1985

to 1988 is difficult because of the business cycles

that affect growth. The 1982-85 period is probably

the best proxy for the growth that occurred from

1985 to 1988, because it is the most up-to-date and

the fact that both are periods of steady, uninterrupted

economic growth. For every $100 billion increase in

GDP from 1982 to 1985, energy use due to just

growth would have grown by 2.16 quads. Thus,

growth from 1982 to 1985 would have caused

energy use to increase by 9.8 quads. Applying the

1982 to 1985 formula to the 1985-88 GDP growth,

energy use would increase by 8.8 quads, over 40

percent more than the overall increase of 6.1 quads
Part IV-Energy Use in the Recent Past and in the Future ● 43

reported by the Department of Energy.fi The

difference between what was actually observed from

1985 to 1988 and what would have happened if all

other factors except growth in the level of spending

were kept constant is very small. From 1982 to 1985,

changes in the mix of spending (-4.6 quads) and

changes in the energy portion of the production

recipe or the energy efficiency of industry (-4.0

quads) reduced the increase due to sheer growth by

8.6 quads, resulting in a net, overall increase of only

2.7 quads,-

less than half of what occurred between

1985 and 1988.

Thus, all of the increase in energy use horn 1985

to 1988 can be attributed to growth in the overall

level of spending or GDP, holding all other factors

constant. The questions that remain are why were the

factors that usually limit this increase due to

growth-shifts in the mix of spending, energy

savings due to changes in the nonenergy portion of

the production recipe, and improvements in energy

efficiency of industry-of a smaller size than usual?

Shifts in the Mix of Spending

A shift in the mix of spending would occur if a

product’s share of growth between 1985 and 1988

was different than the share of spending it represented in 1985. This section looks at how spending

on various products changed from 1985 to 1988

relative to the share of consumption that those

products held in 1985. This is done for each of the

four main areas of spending: households, government, business investment, and international trade.

As shown in table 9, a shift in the mix of products

purchased, such as horn services to manufactured

goods, would cause an increase in energy use.

Households 92

The shift in the mix of household purchases

(personal consumer expenditures) that occurred

between 1985 and 1988, tilted spending towards

durable goods as opposed to nondurable products.

Although durable goods, such as furniture and home

electronics, only represented 15 percent of all

household consumption in 1985, they were responsible for 24 percent of the increase in household

spending from 1985 and 1988. This disproportionate

growth of durables came at the expense of nondurable goods such as clothing and food. Nondurable

spending represented only 23 percent of the growth,

below their 1985 share of 36 percent.

Energy products (which are classified as nondurable) had a mixed experience. Gasoline and oil’s

share of household purchases declined during this

time period,93 but purchases of fuel oil and coal

increased.~ The other major product category

within the household sector, services, slightly increased its share from 1985 to 1988 by generating 53

percent of the increase in household spending from

a 1985 base of 49 percent.

All in all, products purchased by the household

sector seem to have leaned towards a mix that is

more energy-intensive: durable goods increased

their share over nondurables.95

Government 9G

Data limitations restrict the analysis of the changing mix of government expenditures to the Federal

Government, where the mix underwent a radical

realignment from nondefense purchases to defense

purchases. 97 In real terms, nondefense purchases

declined by 16.2 percent from 1985 to 1988, while

defense purchases increased by 10.2 percent.98 The

disproportionate growth occurring within defense

has been in durable goods (aircraft, missiles, tanks,

etc.) which have been responsible for 51 percent of

the 1985 to 1988 growth in defense expenditures

horn a 1985 share of 30 percent.w Thus, government

spending at the Federal level has undergone a shift

horn nondefense to defense purchases, which are

about 1.5 times as energy-intensive.lm

International Trade

Of all the sources of demand that make up the

GNP, the one that showed the most pronounced

disproportionate growth during this period was

exports. Although net trade was still in deficit in

1985, exports were responsible for 30 percent of the

real, gross101 increase in GNP between 1985 and

1988, even though exports’ share of GNP in 1985

were only 10 percent. Between 1985 and 1988,

exports grew by 44 percent while imports increased

by only 28 percent. This gain in exports is probably

attributable to the sharp devaluation of the dollar that

occurred after 1985, making U.S. exports more
44 ● Energy Use and the U.S. ECOnOmy

attractive overseas.102 For example, exports of steel

mill products increased by 121 percent from 1985 to

1988, while imports of steel mill products decreased

by 14 percent.103 Aluminum also rebounded with

exports increasing by 44 percent and imports falling

by 5 percent.lw Over one-half of the increase in

overall exports came from capital goods (e.g.,

machine tools and computers) whose 1985 share was

37 percent.los The other leading category of increase

was in consumer durables, which generated 11

percent of the growth from a 1985 base of 5 percent.

Aside from imports, exports are the most energyintensive component of demand because exports are

largely composed of semifinished intermediate

goods and manufactured products that have a high

energy content.106

In conclusion, it appears that every category of

spending either stayed constant or experienced a

shift in the mix of spending towards products that are

relatively energy-intensive. In particular, exports

and defense purchases surged and are undoubtedly

part of the reason why energy use increased between

1985 and 1988.

Shifts in Output

If the mix of spending became more energyintensive, the output horn energy-intensive sectors

should also be disproportionately large. Figure 15

illustrates the fact that a slight shift in the composition of output towards energy-intensive industries

could have a pronounced effect on energy use. Two

data sources, the Federal Reserve Board’s Industrial

Production Index107 and the Bureau of Labor Statistics (BLS) Output and Employment Database108

indicate that a shift in the composition of output

towards these energy-intensive sectors occurred

between 1985 and 1988.109

The Industrial Production Index (IPI) grew by

10.6 percent from 1985 to 1988. Of the three major

sectors covered by this index, manufacturing grew

by 13.2 percent, mining declined by 5 percent, and

utilities grew by 1.8 percent. Within manufacturing

the largest percent gains in the index from 1985 to

1988 occurred in lumber (21.5 percent), printing and

publishing (19.6 percent), chemicals (19.6 percent),

rubber and plastic products (18.6 percent), nonelectrical machinery (which includes computers) (17.8

percent), and paper and paper products (17.4 percent). Three of these six industries produce products

that are among the top 11 most energy-intensive

(table 9).

The BLS database has shipment (gross output)

data on every sector in the economy. Of the 10 major

(one digit SIC) sectors, manufacturing increased its

share of total shipments the most from 1985 to 1988,

growing from 32.9 percent of all shipments to 33.8

percent. The service sector was second, growing

from 13.8 percent to 14.2. The 0.9 percent gain in

share by manufacturing sounds small, but translates

into a $50 billion increase in real shipments over the

3-year period.~ This gain in share breaks a trend

where manufacturing fell from a 35.8-percent share

of output in 1972 to 32.9 in 1985.

Within manufacturing, the three industries experiencing the largest gain in share of manufacturing’s

total output were machinery, except electrical

(which includes the computer industry) whose share

grew by 1.4 points, chemicals (0.5 point gain), and

primary metals (0.3 gain). Chemicals, primary

metals, and to a lesser extent machinery are all

relatively energy-intensive industries.

When the increase in output achieved by the

manufacturing sector between 1985 and 1988 is

multiplied by the 1985 energy intensities shown in

table 9, it reveals that just the growth in manufacturing output, holding the energy efficiency of the

products constant at their 1985 level, could have

caused energy use to increase by 7.7 quad. The big

three contributors to this increase were the chemical

industry (2.2 quads), primary metals (1.2 quads) and

machinery (except electrical (0.8 quad)). A significant portion (90 percent) of this increase is due to

sheer growth in the level of output. The change in

output mix from 1985 to 1988 caused energy use in

the manufacturing sector to increase by 0.77 quad.

Although small, the fact that this change in mix led

to a net gain in energy use is contrary to the trend

established between 1972-85.

These preliminary findings, based on output data,

support the idea that a shift in spending (final

demand) did occur that caused energy use to

increase. Instead of offsetting the increase in energy

use due to arise in the level of spending, the mix of

spending changed between 1985 and 1988 in such a

way that energy use increased-reversing the trend

set in the 1972-85 period. Thus it appears that the

*Based in constant 1982 dollars, the total value of gross output for the whole economy in 1988 was $7.3 trillion.
Part III--Energy Use in the Recent Past and in the Future ● 45

industrial structure of the economy shifted into a

more energy-intensive configuration.

Changes in Energy Efficiency

The other factor that has traditionally acted as a

brake on increases in energy use due to growth has

been energy savings associated with changes in the

way products are made. From 1972 to 1985, nearly

four-ftiths of the energy savings attributed to

changes in the process of production (the production

recipe) were due to changes in the way energy was

used as an input.

Given that energy-efficiency improvements were

the dominant factor behind the leveling of energy

use between 1972 and 1985, could energy-efficiency

gains have stopped or even reversed themselves

between 1985 and 1988? Evidence indicating how

energy efficiency has changed is very limited. In

theory, some inefficiencies would be expected as the

economy continues to expand and plant utilization

begins to hit capacity constraints. For example, as

demand for steel continues to rise, moth-balled, old

facilities using outmoded technology, like openhearth furnaces, might be brought back online,

causing the energy efficiency of steel production to

dip .

1 1 0

At least for the steel industry this has not been the

case. The percentage of steel made from relatively

inefficient processes, such as open-hearth or blast

furnace methods, declined between 1985 and 1988,

with the most energy-efficient mode, electric arc,

gaining. 111 More generally, the Federal Reserve

Board reports that capacity utilization in manufacturing did increase horn 80 to 83 percent horn 1985

to 1988112 and that the bulk of this jump occurred in

the more energy-intensive primary processing portion of manufacturing where the capacity utilization

rate jumped from 81 to 87 percent.113 Nevertheless,

these capacity utilization levels are below the rates

set from 1978 to 1980 when manufacturing hit 86.5

percent of capacity and primary processing climbed

to 89.1.114 Even at these high levels set between

1978 and 1980, efficiency gains were still

achieved.115 It is thus unlikely that the 1985-88

levels of capacity utilization led to significant

inefficiencies in energy use.116

In fact, this notion that businesses might reactivate old, inefficient modes of production might need

updating to take into account the 1982 recession,

which led some manufacturers, especially those in

the “smokestack” industries, to permanently retire

their oldest facilities or transfer operations to offshore sites. Thus, in some cases, the old capacity no

longer exists. For example, Pittsburgh was once

thought of as the U.S. capital of steel production, but

today many of the old U.S. Steel facilities have been

torn down and the local economy has shifted

towards financial services. U.S. Steel has diversified

into retail, transportation, and oil industries.117

Coupled with this is the fact that investment in

new equipment by businesses usually results in

energy-efficiency gains as old equipment is replaced

by new.118 The investment rate by businesses during

1972 to 1985—a period of energy-efficiency gains

by business-was an annual rate of 4.7 percent,

significantly below the 1985 to 1988 rate of 6.9

percent. 119 1t is unlikely that these new investments

hindered energy efficiency, rather, they are likely to

have improved efficiency.

Lastly, the real price of energy dropped from 1985

to 1988, reducing the incentive for making energyefficiency improvements (figure 18). The price for

crude oil & gas, for example, fell from $27 per barrel

(current dollars) in 1985 to $14 in 1988.120 But

falling energy prices do not necessarily result in

declines in energy-efficiency gains due to changes in

the production recipe. 121 Figure 13 shows that

savings in energy due to the production recipe were

achieved from 1982 to 1985, another period of

declining energy prices. 122 Likewise, fuel-efficiency

improvements were made between 1958 and 1971,

another period of low and falling fuel prices-albeit,

not as steep a drop as what occurred between 1985

and 1988.123 Energy efficiency gains are frequently

associated with modernization efforts undertaken to

achieve objectives other than energy savings such as

improving quality, boosting yields, or increasing the

flexibility of production.124

Summary

Although a conclusive answer cannot be reached,

it appears from the data available that the rise in

energy use from 1985 to 1988 was largely due to

strong growth in the overall size of the economy and

a shift in economic activity towards more energy

intensive industries. No evidence was found that

would indicate that businesses’ energy efficiencies

have declined during this period. Rather, it appears

that structural shifts toward energy-intensive production could not be countered by energy-efficiency
46 ● Energy Use and the U.S. Economy

Figure 18-Composite Fossil Fuel Prices

(1982 dollars)

Cents per mllllon Btu

350 I

improvements, leading to a net increase in energy

use. Some of this structural shift could be due to a

leveling of household energy efficiency, which

would affect the mix of household purchases.125 It is

important to note that changes in economic structure

are not as permanent as the word ‘structure’ would

suggest. Trends in both industrial structure and

energy use can be reversed in a relatively short time.

This increase in energy use due to changes in the

structure of the economy could be hiding decreases

in energy use due to efficiency gains that continue to

be made.

In any event, a 6-quad, 8-percent increase in 3

years-reaching an all-time peak in energy use,

which breaks a precedent established over 13 years

of very little or no growth in energy use, is surprising

and necessitates a more thorough analysis than that

provided here. A prerequisite for that analysis is

more timely and detailed data.126

SPECULATION ABOUT ENERGY

USE IN THE FUTURE

This up-tick in energy use from 1985 to 1988

generates concern about whether we are approaching limits to the energy-efficiency improvements we

can expect in the fiture.127 Speculation about future

energy use is fraught with difficulties and caveats.

Factors that can be incorporated into a computer

model tend to be insignificant in comparison to

events that are nearly impossible to predict, such as

the invention of the microchip or the Iranian

Revolution. Attempts at specific forecasts made in

the mid- 1970s accurately predicted that the energy

intensity of the U.S. economy would decline, but

underestimated the rate of the decline, leading to

predictions that were 42 percent above actual use.128

For the purposes of this report, broad future

trends, which lend a sensitivity to what is likely v.

what is unlikely, are more appropriate than specific

predictions. The discussion is broken into two

sections, economic growth and technology, that

roughly correspond to the framework of structure

and energy efficiency used throughout this report.

Economic Growth

Economic growth is determined by a myriad of

factors, including demographics, government

spending, monetary policy, trade policy, income

distribution, productivity rates, and savings rates.129

Accounting for all these factors simultaneously,

even in a broad framework, is beyond the scope of

this report. As a result, this discussion relies on the

findings of work done by BLS in their estimate of

employment for the year 2000.130 Their projections

are based on a number of inputs, including an

econometric model prepared by Data Resources,

Inc.; demographic projections estimated by the

Bureau of Census; and energy use projected by the

U.S. Department of Energy.131

The BLS projections include three scenarios:

high-, moderate-, and low-growth. Table 10 shows

the 1988 to 2000 GNP growth rates and unemployment rates for each of the scenarios as well as

corresponding figures for the previous 12-year

period, 1976-88. The moderate-growth scenario is

arbitrarily selected as a vehicle for setting parameters of what is likely and unlikely to happen. The

growth rate of GNP under the moderate-growth

scenario is less than that achieved between 1977 and

1988, largely because of a projected slowing of the

growth in the size of the labor force and an

expectation that the Federal budget and foreign trade

deficits will be reduced.132

The slowdown in growth in the next 12 years in

comparison to the last 12 means that expenditures

from the household and government sectors will

decline relative to growth in GNP, while exports will

increase at a rate that exceeds GNP growth.133 The
Part IV--Energy Use in the Recent Past and in the Future ● 47

Table 1O--BLS Projections of GNP Growth Rates

and Unemployment Rates Under Scenarios of

Low-, Moderate-, and High-Economic Growth

Real GNP annual growth rate

1988-2000

Economic growth

1976-1988 Low Moderate High

2.9 1.5 2.3 3.2

Civilian unemployment rate

2000

Economic growth

1976 1988 Low Moderate High

7.7 5.5 7.0 5.5 4.0

slowdown in the household sector is attributed to a

slower rate of population growth and household

formations. In particular, expenditures on household

furnishings and motor vehicles are predicted to

decline.l w The desire to reduce the Federal budget

deficit is predicted to cause a reduction in the level

of military expenditures and cause moderation in

nondefense spending, leading to a balanced Federal

budget late in the century. Assuming that the value

of the dollar remains low, BLS projects that imports

will decline as exports, particularly manufacturing

machinery, increase due to strong economic growth

overseas. 135 In such a scenario, the trade deficit

comes into balance in the mid-1990s.136

This moderate-growth scenario translates into

healthy output increases in durable manufacturing,

wholesale trade, and services (health, business

services, and child care) sectors (table 11).137 In

terms of energy use, 4 of the top 15 most energyintensive industries are predicted to have above

average growth from 1988 to 2000.138 The largest

gains occur in relatively high value-added but less

energy-intensive manufactured products like computers, semiconductors, and optical products.139 The

fraction of output devoted to services continues to

grow under this scenario with especially strong

growth in computer and data processing, nursing

facilities, outpatient facilities, child care, and residential care (senior citizen complexes)-industries

that are relatively low in energy intensity.

BLS predictions suggest that economic growth in

the next decade will be lower than it was in the recent

past. Thus, on the basis of sheer growth alone, the

increase in energy use should be less in the future

than it was between 1976 and 1988. In terms of

energy use associated with changes in the composition of output-structural change-the picture is

mixed. The manufacturing sector is predicted to

benefit from increases in exports, while being hurt

Table 11—BLS Projections of Outputa by Major Industry Division Under a Scenario of

Moderate Economic Growth

Percent distribution Annual rate of change

2000 1988-2000

Real GNP annual growth rate 1976 1988 Moderate 1976-1988 Moderate

Total . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 2.7 2.3

Goods-producing . . . . . . . . . . . 46.4 43.5 43.0 2.1 2.2

Mining . . . . . . . . . . . . . . . . . . 4.2 3.0 2.5 -0.1 0.6

Construction . . . . . . . . . . . . . 6.7 6.6 6.5 2.6

Manufacturing . . . . . . . . . . . 35.5 33.8 34.0 2.2

Durable . . . . . . . . . . . . . . . 17.8 17.7 18.9 2.6 2.9

Nondurable . . . . . . . . . . . . 17.8 16.2 15.1 1.9 1.7

Service producing . . . . . . . . . . . 50.3 53.9 54.5 3.3 2.4

Transportation

and utilities. . . . . . . . . . . . 8.8 8.3 8.4 2.2 2.4

Wholesale trade . . . . . . . . . . 5.0 5.7 6.1 3.9 2.9

Retail trade . . . . . . . . . . . . . . 6.8 7.6 7.5 3.6 2.1

Finance, insurance,

and real estate . . . . . . . . . 11.1 11.8 11.9 3.2 2.3

Services . . . . . . . . . . . . . . . . 11.5 14.2 15.1 4.5 2.8

Government . . . . . . . . . . . . . 7.1 6.3 5.5 1.6 1.0

Agriculture . . . . . . . . . . . . . . . . . 3.1 2.5 2.4 0.7 1.9

Private households . . . . . . . . . . 0.4 0.3 0.2 0.7 0.8

aGross duplicative output.

NOTE: Totals may not add due to rounding.

SOURCE: Valerie A. Personick, “Industry Output and Employment: A Slower Trend for the Nineties,” Month/y Labor Review, November 1989, p. 28.
48 . Energy Use and the U.S. Economy

by decreases in defense spending. On net, manufacturing’s share of output is predicted to increase, but

much of the growth is in “high-tech” products that

have relatively low energy intensities.140 When

viewed across all sectors, changes in energy use

associated with changes in the structure of the

economy do not appear to be significant.

Technology

By causing the mix of what people bought to

change (spending mix) and by changing the way

businesses produced output (production recipe),

technology was a major factor in offsetting the

increase in energy use due to sheer growth in the

economy from 1972 to 1985. Detailed estimates

about the technical potential of future energyefficiency gains is beyond the scope of this analysis.141 Nevertheless, a wide array of energy-saving

technologies exist that could significantly improve

U.S. energy efficiency. 142 Table 12 provides an

incomplete listing of some of the technologies that

are already commercially available, but have yet to

be fully implemented. The intent is to provide a feel

for the range and diversity of energy saving

technologies, not a comprehensive list of all available technologies or a projection of potential gains or

losses.

CONCLUSION

It is easy to be dazzled by the potential energy

savings offered by technology, but realizing this

potential is fraught with a great number of uncertainties. 143 What will it cost? How will it change my

lifestyle? How will unknowns, such as geopolitical

changes, affect the adoption of a particular technology? HOW will energy savings mesh with other

public goals? Ultimately, energy use will be dictated

by the answers to these questions.

Structural changes that result in less use of energy

and the continued improvement in energy efficiency

are likely to continue in the future. A driving force

behind these two factors will be the continued

development and diffusion of information technologies. Just as electricity generated tremendous energy

efficiencies as it freed factory design from the

restrictions associated with steam and water power,

information technologies hold out the promise for

another revolution in the reamer of production.144

These information technologies will place a premium on exploiting flexibility and the ability to

monitor and control production to exact specifications, characteristics that are inherently energyconserving.

These energy savings associated with energyefliciency gains should be bolstered by structural

changes in the economy. The creation of a basic

infrastructure (railroads, factories, highways) that

requires inputs horn energy-intensive industries,

such as steel and cement has been completed,

although the repair and maintenance of these systems will require significant additional resources in

the future.145 Material-intensive consumer products

such as stoves, washing machines, refrigerators, etc.

have begun to hit saturation points.146 The sectors of

the economy that appear likely to dominate in the

future-information processing, software production, biotechnology, aerospace, communications,

advanced materials-have strong “energy-saving

and-avoiding biases. ’’147 Even in energy-intensive

sectors such as manufacturing, success in the future

will hinge on the service component of a product—

timeliness, quality, tailoring to the individual customer—not the energy-intensive material portion of

the product.

In this sense, speculation about future energy use

has to include consideration not only of how

technology will affect energy consumption, but also

how changes in the industrial makeup of the

economy will affect the demand for energy. As can

be seen from the 1972-85 and 1985-88 periods, these

factors can change relatively quickly.

The future holds a unique opportunity for achieving economic growth without incurring the costs

associated with increased energy use. Achieving this

future in not a function of what the United States can

or can not do. History illustrates that economic

growth can be achieved with little or no increase in

energy use. Rather, the future is dependent on what

Americans choose to do as consumers, business

people, and voters.
Part IV--Energy Use in the Recent Past and in the Future ● 49
50 ● Energy Use and the U.S. Economy

NOTES FOR PART IV
Part IV--Energy Use in the Recent Past and in the Future .51
Part V

Appendix

The description of the model used for this analysis

is broken into three sections: methodology, data

sources, and strengths and weaknesses. The appendix assumes that the reader has a rudimentary

knowledge of input-output analysis and mathematical modeling. If additional background material is

needed, see one of the sources cited in box G.

METHODOLOGY

The model developed for this analysis consists of

a series of seven input-output tables that have been

moditled from a strict dollar basis to a mixed dollar

and quantity format in which energy use is measured

in British thermal units (Btu). This mixed format,

which combines dollar values of a product with

quantity values, is called a hybrid model and is

discussed further in the next two sections.

Input-Output Analysis

Simplifying slightly, an input-output table consists of three parts: the Use table, the Make table, and

final demand. The Use table is the heart of the

analysis. Each column of this matrix shows the

dollar value of inputs used in a particular year to

generate that industry’s output. Each row of the

Make matrix shows what commodities each industry

makes in a particular year (i.e., both primary and

secondary products). For example, the chemical

industry makes chemicals as well as drugs, plastics,

paints, and rubber.148

By normalizing the Make table by commodity

output and multiplying it against the Use table which

has been normalized by industry output, a matrix is

created where each element in a column shows the

value of the input commodity needed to make a

dollar’s worth of the commodity being produced

(output). This matrix, A, is referred to as the direct

requirements table. Basically, the matrix, A, represents a series of linear equations that can be solved

simultaneously. The solution, shown below, results

in an inverse matrix, (l-A)-l, called the total requirements table or the Leontief inverse. Each column

represents the production recipe for a particular

product and each cell of a column in this matrix

represents the direct and indirect inputs of a particular commodity required to satisfy a dollar's worth of

final demand for a product. When the total requirements matrix is multiplied by the final demand for

each product, the result is a vector consisting of the

i

j

G

M

u

Q

u’

M

A

Y

x

Hybrid Input-Output Energy Analysis

The construction of a hybrid input-output energy

model involves reorganizing the input-output commodities and industries so that the first five rows and

the first five columns are energy commodities and

energy industries.149 The dollar flows of energy

inputs in the Use table are replaced with the quantity

(Btu) of energy required. Similarly, the energy

portion of final demand (the first five rows) are also

converted to Btu. Instead of representing the dollar

amount of an input needed to generate a dollars

worth of output, the hybrid direct requirements or

“A” table represents four different relationships:

Quadrant 1: Btu of energy input needed per Btu of

energy sector output.

Quadrant 2: Btu of energy input needed per dollar of

nonenergy sector output.

–53–
54 Energy Use and the U.S. Economy

Table 13-Primary Energy Conversion Ratios

1963 1967 1972 1977 1980 1982 1985

Coal mining . . . . . . . . . . . . . . . . . . . . . . . . 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 I.0000

Crude oil & gas . . . . . . . . . . . . . . . . . . . . . 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000

Refined petroleum . . . . . . . . . . . . . . . . . . 0.0536 0.0540 0.0628 0.0493 0.0469 0.0624 0.0635

Primarv electricity . . . . . . . . . . . . . . . . . . . 0.5436 0.5748 0.5732 0.6854 0.7168 0.8211 0.8401

Utility gas . . . . .’... . . . . . . . . . . . . . . . . . 0.0543 0.0644 0.0696 0.1072 0.1032 0.1059 0.1068

SOURCE: S. Casler, “Energy Flows Through the U.S. Economy, 1980,1982, and 1985,” contractor report prepared for the Office of Technology Assessment,

December 1989.

Quadrant 3: dollars of nonenergy input needed per

Btu of energy sector output. Energy sectors Nonenergy sectors

I I 1

Quadrant 4: dollars of nonenergy inputs needed per

dollar of nonenergy sector output.

Energy inputs

Quadrants 1 and 2 correspond to the energy portion

of the production recipe while quadrants 3 and 4

represent the nonenergy portion.

Nonenergy inputs

By multiplying the inverted hybrid energy inputoutput table (Ae

) by the hybrid final demand (Ye), a

Btu/Btu

1

$/Btu

3

Btu/$

2

$/$

4
Part V--Appendix ● 55

column of outputs for each commodity is generated.

The output for the first five rows represents the

energy output by type required to satisfy the level

and mix of demand specified. In forming a measure

of aggregate energy use, it is necessary to eliminate

the double counting of energy that would occur if

both the coal used to make electricity and the

electricity that is generated from the coal were

counted. To eliminate this double counting, primary

conversion ratios (table 13) are applied to the output

of each energy type. As can be seen, by their nature

crude oil and coal are already in a primary state, thus

the conversion ratios are ones. Primary electricity

has a relatively high conversion ratio because

nuclear and hydroelectric power areme converted to

Btu based on their fossil fossil fuel equivalent.150 After

these primary energy conversion ratios are applied,

the sum of energy across energy types represents the

energy produced in the United States. To calculate

the consumption of energy, the sum of the absolute

level of energy imports minus the primary energy

associated with energy exports are added to the

production total.fi

Table 14 shows that the differences between

energy consumption estimates produced by the OTA

model and those published by the Department of

Energy are relatively small, except for 1963 and

1967 where the differences exceed 3 percent. The

differences that do exist can probably be attributed

to revisions made in the raw energy use numbers and

the primary energy conversion ratios that were not

subsequently made in the National Energy Accounts

data.

Decomposing the Change and the

Interactive Factor

The calculation of the change in energy use due to

different economic factors was achieved by using

1985 as a base year and systematically varying one

factor over time while holding all other factors

constant in their 1985 form. For example, to

calculate the change in energy use due to shifts in

spending, the production recipe was held constant in

its 1985 form, and final demand for each year (1963,

1967, 1972, 1977, 1980, 1982, and 1985) was

applied. The change in energy use horn 1972 to 1985

due to final demand (spending) was calculated by

subtracting the energy output associated with 1972

demand (using the 1985 production recipe) horn the

Table 14-Comparison of OTA Energy

Consumption Estimates With Estimates Published

by the Department of Energy (DOE)

(quadrillion Btu)

Percent

OTA DOE difference

1963 . . . . . . 50.08 48.32 3.6

1967 . . . . . . 60.66 57.57 5.4

1972 . . . . . . 73.03 71.26 2.5

1977 . . . . . . 78.60 76.29 3.0

1980 . . . . . . 77.19 75.96 1.6

1982 . . . . . . 72.22 70.84 1.9

1985 . . . . . . 74.94 73.94 1.4

SOURCE: Office of Technology Assessment Energy Model; and U.S.

Department of Energy, Energy Information Agency, Annual

Energy Review, May 19SS, table 4.

output generated using 1985 demand (using the

1985 production recipe). By doing this to every

component and subcomponent, the change in energy

use can be attributed to different factors. In some

cases, this decomposition of the change was not due

to a single factor, but was instead due to two or more

factors changing simultaneously causing an interaction which affected energy use.

Unlike a residual in regression analysis, the

interactive factor is not unexplained variance; rather,

it is accurately allocated to an identifiable, but

difficult to interpret factor that is the simultaneous

change of two (or more) variables. For example, an

interactive change may have occurred in the case

where the substitution of plastics for steel in an

automobile to decrease weight caused both a change

in the production recipe, and a change in the mixture

of spending as more fuel-efficient autos required less

gas and thus realigned the mix of products a

consumer bought.

Interactive factors are common to all types of

shift-share analyses, although many of those reported are of a smaller magnitude than the one

calculated in this study.151 The interaction term that

exists when the change in the product of two or more

variables is decomposed into individual effects is

present because data are measured over discrete

versus infinitesimal time changes. The use of

input-output analysis precludes an annual time

series, instead breaks between data points tend to be

2 to 5 years in length. In particular, the 5-year span

in data from 1972 to 1977—a period of tremendous

turmoil in terms of energy use because of the first oil

shock—was the period that generated nearly two-
56 ● Energy Use and the U.S. Economy

thirds of the total interactive effect registered

between 1972 and 1985. Not surprisingly, over 85

percent of the interaction between spending and

production recipe was in crude oil& gas.

A in energy A in spending A in production interaction of

use recipe production recipe

and spending

derived for each of the decompositions such as

separating the energy effect from the nonenergy

effect in changes in the production recipe:

where Pe is energy portion of the direct requirements

table and Pn is the nonenergy portion of the direct

requirements table which are then combined and as

hontief’s “A” and converted to a total requirements matrix.

The decomposition of the change in spending into

increases in the level of spending and changes in the

where S1 is the level of spending and S~ is the mix

of spending.

The size of the interaction effect is a function of

the magnitude of the effect attributed to identified

variables. Since both spending and the production

recipe were found to have a large impact on energy

use, it is not surprising that the interaction of these

two factors was also large. Because of the longer

time period being analyzed, the wider range of

sectors being included, and the unavailability of a

1985 input-output table, the fact that the interactive

factor is larger than those reported in other studies is

to be expected.152

In models of structural decomposition, treatment

of this effect varies and no consistent set of standards

seems to apply in dealing with it. For example, as

seen in the recent literature, Wolff153 ignores the

interaction term, Feldman et al.154 and Boyd et al.155

allocate it equally among the other sources of

change, while Casler and Hamon,156 Roop,157 and

the Department of Energy 158 treat it separately and

report its magnitude. Given that the interactive term

is a unique factor that affects energy use, we decided

to keep it as a separate variable and report its value.

Calculation of Energy Intensities

The primary energy intensities presented in table

9 were calculated using gross output or shipments,

not value-added, in the denominator of the ratio.

Neither measure of output is free of methodological

problems, but gross output is more appropriate given

the analysis being undertaken.

Gross output data reflect the value of the whole

product, which consists of components made by

other businesses (suppliers) and the value added to

those components by the producing business. Value-

-added is just the additional value supplied by the

firm in its conversion of raw inputs into a final

output. Businesses can boost their gross output

simply b y ‘ ‘out-sourcing’ ‘ more intermediate

parts-in some cases the whole product can be

out-sourced. 159 When aggregated across sectors or

the whole economy, shipments data reflect a lot of

double counting since both the supplying firm and

the buying firm count the same product as output.l60

The double counting makes calculating shares of

output by industry and a shifting mix of the economy

horn gross output data problematic.

Unlike gross output, constant dollar value-added

by industry161 is a residual of a “double-deflation”

process where deflated intermediate inputs are

subtracted horn deflated gross output. 162 This proc--

ess requires extensive intermediate input data and

deflators for each industry, including services where

such data is limited. It also necessitates an adjustment for imported intermediate inputs whose price

changes might not be accurately reflected in deflators based on domestic products, such as the

Producer’s Price Index (PPI. Depending on how

these adjustments are made, significant changes in
Part V--Appendix ● 57

Table 15-OTA Energy Model Data Sources and Coverage

Income and Product Accounts).

SOURCE: Office of Technology Assessment, 1990.

industry- and sector-level constant dollar value-

-added can occur.lG3 In an effort to address some of

these issues, the Bureau of Economic Analysis is

revising its constant dollar value-added by industry

series,l a making it currently unavailable.lG5

DATA SOURCES

The construction of this model required four key

data components for each year: input-output tables,

final demand, energy use, and deflators.

Input-Output

As described in box G, input-output (I-O) tables

provided a snapshot of the inputs required to make

the economy’s outputs in a particular year. Because

energy is primarily an intermediate rather than a

final product, I-O tables are particularly well-suited

for this type of analysis. I-O tables are unique in that

they incorporate data from nearly every Federal

statistical agency and numerous private sources,

allowing a comprehensive, consistent treatment of

the whole economy. Nevertheless, the data intensive

nature of I-O tables means that “benchmark” I-O

tibles, which incorporate quinqennial economic

census data such as the Census of Manufactures are

only issued once every 5 years,ti and there is a

delay of 6 to 8 years between the year the data was

collected and its release as input-output data.lfi To

alleviate this problem, the Department of Commerce’s Bureau of Economic Analysis (BEA) issues

annual tables that are updates of the more rigorous

benchmark tables.lG7 In addition to updating the

input-output relationships between commodities

and industries for changes in the prices that have

occurred since the release of the benchmark table,

the annual updating process also incorporates new
58 ● Energy Use and the U.S. Economy

1.4 percent above that reported by the Department of

Energy.1 73

This technique of just updating the energy portion

of the input-output tible has been shown by other

researchers to be more accurate than not making the

modification. 174 Accurate results are more likely if

the updating occurs over a short period of time, such

as the 3-year span between 1982 and 1985,175

because changes in input-output coefficients occur

gradually for many sectors of the economy.176

Final Demand

Final demand was available for every year except

for 1985 horn the corresponding input-output tables.

Since a 1985 I-O table does not currently exist, 1985

final demand by I-O commodities was estimated by

converting demand as reported in the National

Income and Product Accounts (NIPA)177 into demand by I-O commodity. The conversion of demand

horn NIPA categories into demand by I-O commodities is accomplished through use of ‘bridge’ tables

produced by BEA. In the case of households

(personal consumer expenditures or PCE)178 and

business investment in personal durable equipment

(PDE),179 the bridges are published along with the

1977 input-output table.180 For the remaining categories of domestic demand—government181 and

business investment in structures182-unpublished

versions of these bridge tables were obtained from

BEA. xxxiv

Import and export data for 1985 were obtained in

unpublished form from the Bureau of Labor Statistics’ Office of Economic Growth and Employment

Projections in their 222 sectoring scheme and were

converted to the BEA’s input-output classifications

using a BLS sectoring plan.183

Adjusting for Changes in Prices

The analysis of change in the economy over time

requires that each year’s final demand and associated input-output tables be based in the same set of

prices-allowing a consistent comparison overtime.

This process of establishing a constant set of prices

corrects not only for the effects of inflation on a

product’s price, but also for quality changes that

have occurred in the product over time, such as the

addition of a turbocharger to an engine. The

common name for this process is deflation because

the current price of a product is deflated to some

price in the past, although the reverse also occurs.

Currently, 1982 is the most up-to-date base year.

This issue was discussed in box F and in the

upcoming section of strengths and weaknesses.

The deflators used in this analysis are based in

1982 and were obtained from the Bureau of Labor

Statistics “Historical Input-Output Time Series

Data Base,”184 and were aggregated to the BEA

sectoring scheme using current dollar weights of

output in accordance with the BLS sectoring plan

and unpublished worksheets from BLS.185 A deflator was derived for each nonenergy commodity.

Since energy commodities are valued in quantities

(Btu), no deflation was necessary.

Comparisons to Gross National Product

(GNP)

Since the sum of all components of final demand

is GNP, a preliminary check of the bridging process

from NIPA to I-O commodities and the deflators is

to compare the deflated total of GNP as derived

through this process with the constant dollar GNP

figures published by BEA in the Survey of Current

Business. Table 16 shows that the difference between the two series averages less than 1 percent.

This difference can probably be attributed to revisions in the National Income and Product Accounts

that are not incorporated in the input-output tables

and the use of different deflators. Comparisons of

constant dollar final demand at the commodity level

can not be made because BEA does not produce a

constant dollar final demand series in commodity

categories.

Measures of Economic Activity

No one statistic can adequately reflect economic

growth or changes in a country’s standard of living.

This is especially true as an economy develops,

incomes rise, and greater concern is directed towards

the costs associated with economic activity such as

pollution, depletion of natural resources, and traffic

congestion that are typically not accounted for in

economic indicators like GNP.186 Nevertheless,

GNP was never intended to be a proxy for economic

development; rather, it is an estimate of “. . . the
Part V--Appendix ● 59

Table I6--Comparison of OTA GNP Estimates With

Estimates Published by the Bureau of Economic

Analysis (millions of constant 1982 dollars)

1963 . . . . . . 1883.9 1873.3 0.6

1967 . . . . . . 2286.9 2271.4 0.7

1972 . . . . . . 2638.9 2608.5 1.2

1977 . . . . . . 2946.3 2958.6 -0.4

1980 . . . . . . 3140.2 3187.1 -1.5

1982 . . . . . . 3190.7 3166.0 0.8

1985 . . . . . . 3622.6 3618.7 0.1

Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2

A component of GNP, Gross Domestic Product

(GDP) is used throughout this report. The difference

between GNP and GDP is the net return on capital

located abroad but owned by U.S. residents minus

the income from capital owned by foreigners but

located in the United States-a category called

“Rest of World” (RoW).188 The category does not

reflect actual output, but rather the returns (wages,

profits, interest) associated with that output. For

example, the dividends received by a U.S. investor

in a European company and the interest paid to

Japanese holders of U.S. Treasury bonds would both

be counted in RoW.

Historically, the RoW category has been a small

accounting adjustment made to the national accounts. Over the time period being analyzed (1963

to 1985), the RoW category grew in size and became

erratic, hitting a high of 1.74 percent of GNP in 1980

and a low of 1.00 percent in 1985. In 1980, these

payments were equal to 86 percent of the contribution made to GNP by the farming sector. Because

these accounts do not represent tangible output of a

good or service, they do not affect energy use; but

because of their volatility, their inclusion does affect
60 ● Energy Use and the U.S. Economy

Table 17—Listing of Broad Sectors and Individual Industries/Commodities in the OTA Energy Model

Energy sector 45

1 Coal mining 46

2 Crude petroleum and natural gas 47

3 Petroleum refining and related industries 48

4 Electric utilities 49

5 Gas utilities 50

Natural resources sector 51- .

6

7

8

9

10

11

12

13

14

15

Livestock and livestock products

Other agricultural products

Forestry and fishery products

Agricultural, forestry, and fishery services

Iron and ferroalloy ores mining

Nonferrous metal ores mining, except copper

Stone and day mining and quarrying

Chemical and fertilizer mineral mining

New construction

Maintenance and repair construction

52

53

54

55

56

57

58

59

61

62

Manufacturing 63

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

76

77

78

79

80

81

82

83

84

85

86

87

88

Communications, except radio and television

Radio and TV broadcasting

Water and sanitary services

Wholesale and retail trade

Finance and insurance

Real estate and rental

Hotels: personal and repair services (excluding auto)

Business services

Automobile repair and services

Amusements

Health, education, social services, and nonprofit

organizations

Federal Government enterprises

State and local government enterprises

SOURCE: Office of Technology Assessment, 1990.

double counting of energy consumed would occur. STRENGTHS AND WEAKNESSES

The energy associated with both the sale and captive

use of wood are not included. Lastly, purchases of OF THE OTA ENERGY MODEL

energy products that are used as feedstocks, such as Economic models like the one used for this

the petrochemical industry’s use of petroleum, are analysis are simulations of reality and thus suffer

included in the NEA energy flows. from being unable to completely reflect all facets of
Part V--Appendi.x ● 61

a real economy. The power of models lies in the fact

that “what if” questions can be asked that reveal

knowledge that would be difficult, dangerous, or

impossible to obtain from the real economy the

model emulates. In this sense, all models have their

strengths and weaknesses and the results obtained

should be interpreted with attention to these traits.

The following section outlines some of the character

strengths and flaws of the OTA energy model.

Strengths

There are two major strengths of the model: 1) it

is based in input-output data and analysis, and 2) the

hybrid nature of the model.

Input-output

Input-output tables reflect the state of the economy at a particular time-a snapshot. The strength

of this analytical technique is that it is rooted in real

data that is the bedrock of the national accounting

system used for estimating the performance of the

economy. No economic activity that occurs in the

formal marketplace escapes this accounting. Because I-O plays this critical role in the U.S. statistical

system, the data are unusually complete and internally consistent, and cover every sector of the

economy.

194 AS a result, the OTA energy model

encompasses the whole economy, not just individual

or aggregated sectors such as manufacturing. As can

be seen from the analysis in part III, the service

sector is an important component of the U.S. energy

equation. These features make I-O analysis an

invaluable tool in examining how the structure of the

economy has evolved.195

In addition to its data intensiveness, another

strength of I-O analysis is the ability to capture the

interrelationships and linkages that exist between

sectors of the economy. By being able to trace the

direct and indirect links, input-output lets the

researcher calculate the complete energy required to

make a product from raw material all the way to the

retail outlet. These interconnections allow not only

a tracing of the direct energy associated with some

economic activity, but also the indirect energy

embodied in specific goods and services. Seemingly

low energy-intensity products such as water &

sewage treatment use a lot of energy when the direct

and indirect effects are included. As an increasing

number of products are part of complex production

systems that extend beyond U.S. borders, this ability

to calculate the energy embodied in a product is

important and is unique to I-O models.

The construction of input-output tables allows a

separation of changes in energy use due to what is

being purchased (spending) and how that product

was produced (production recipe), a feature that is

distinctive to input-output analysis. Because spending (final demand) is an identifiable component of

input-output tables, it allows a researcher the ability

to focus on different aspects of demand, analyzing

how different products or sources (households v.

government) affect energy use. Similarly, experiments such as how much of the change in energy use

associated with the production recipe comes from

energy inputs and how much horn nonenergy inputs

can be run. This level of detail and the ability to

separate direct energy use horn indirect energy use

is a valuable feature associated with input-output

analysis.

Lastly, the input-output method of analyzing

change in energy use does not force the researcher to

constantly view energy use as a ratio where it is

always entangled with some other variable such as

value-added or output.196 Thus, actual quantities of

energy use are reported as opposed to quantities

contingent on some economic variable.

Construction of a Hybrid I-O Table

Modifying an I-O table so that energy is expressed

in quantities such as Btu instead of dollars (a hybrid

model) creates numerous methodological advantages. First, valuing a good in Btu rather than dollars

eliminates the need to adjust for changing prices

over time, eliminating a possible source of error.

Second, through the mathematics of input-output,

energy intensities (Btu per dollar of output) are a

byproduct of calculating energy consumption.

Third, the hybrid method avoids the need to convert

dollar-based energy output into energy quantities,

such as Btu, using a simple conversion ratio (Btu per

dollar of energy output or implicit price). Since the

price paid for different types of energy by different

industries varies significantly, using an average

price for all industries can introduce a significant

distortion (see figure 19).197 Thus, the OTA model

implicitly uses a unique price for each fuel type for

every industry.

Lastly, only through using a hybrid I-Omodel can

the production recipe be divided into its energy and

nonenergy portions. Use of conversion ratios like
62 ● Energy Use and the U.S. Economy

Figure 19-implicit Price Paid per Btu of

Refined Petroleum

1.8

1.6

1.4

1.2

1

0.8

0.6

0.4

0.2

0

‘Industry pric e ‘Average pric e

SOURCE: U.S. Department of Energy, Energy Information Agency,

Annual/Energy Review, 1988 (DOE/ElA41364(66)), May

1969, table 27, p. 65.

those described above would not capture the direct

and indirect changes associated with the inversion of

the matrix.198

Limitations

Data

While I-O accounts have a number of advantages,

they do suffer from data and methodological limitations. Because the model is based on observed data,

there tends to be a long lag time between the

collection of data and the availability of I-O tables.

A‘ ‘benchmark’ table for 537 business categories is

published following publication of the industrial

censuses, which are conducted every 5 years. The

benchmark table for the 1977 I-O tables became

available only in 1984. A 1982 benchmark table has

not yet been released. Asaresult,a‘‘revision’ of the

1977 benchmark, updated to 1982 and aggregated to

85 business categories, is the latest I-O table used in

this analysis. Although 85 industries provide sufficient detail for the a broad study of the economy,

more detail is necessary for pinpointing changes and

avoiding biases associated with aggregation. For

example, what appears to be a change in the steel

industry’s (SIC 331) production recipe resulting in

less energy use per unit of output might have little to

do with technology and instead be attributable to a

shift in production from pipes and tubes (SIC 3317)

to wire and nails (SIC 3315).

The sporadic nature of benchmark I-O accounts

means that a continuous time series is impractical to

assemble. A weakness of this analysis is that it relies

on six I-O tables to explain changes in energy use

that occurred over a 22-year period-temporal

peculiarities can skew the findings. This limitation

means that turning points, such as the first year that

the energy intensity began to decline, 1971, are in

some cases missed. The lack of a continuous series

restricts any connection between business cycles

and energy use to causal observances because annual

trends cannot be plotted.

Only four of these six I-O tables (1%3, 1967,

1972, and 1977) were the more detailed and accurate

benchmark tables; the 1980 and 1982 tables were

annual updates of the 1977 benchmark. Given the

severe economic recession of 1982, its use as a

datapoint, especially an endpoint, is questionable.

This problem is reduced through the updating of the

energy and final demand components to 1985.

Although no set of endpoints are typical, 1972 and

1985 are at relatively the same point in the economic

cycle.

Other than the input-output data, the other data

sources employed, deflators and the NEA, also have

their share of weaknesses. By and large, deflators

used in this analysis are of good quality: a unique

deflator is used for each industry and the same series

can be used over the whole time period being

studied. Nevertheless, the significance of deflators

as a source of error and distortion is frequently

overlooked. The main weakness associated with

deflators is that it is very difficult to make quality

adjustments for service products where the output is

inherently hard to measure and for products experiencing rapid technological change such as computers.lw In particular, the accuracy of the computer

deflator has been debated.2m Whether corrector not,

its effect on economic analysis is substantial, and

additional work needs to be done to test the

sensitivity of the findings presented in this report to

changes in the deflators used.

NEA data are the only source for consistent

energy use data by industry overtime. Nevertheless,

the accounts suffer horn a lag of roughly 4 years: the

1985 data were released in 1989. The lag associated

with NEA and the I-O tables limits the analysis to

1985, leaving a gap in trying to explain the more

recent, 1985 to 1988, increase in energy use. A

limiting assumption associated with the NEA is that

the economic value of all types of energy are

equal-a Btu is a Btu regardless of the type. This

conversion of energy type into a common unit, Btu,
Part V--Appendix ● 63

conceals the fact that different forms of energy have

unique properties and are not equivalent replacements for each other.201 Some analysts argue that

when the quality of a particular energy type is taken

into account, the decline in the energy intensity in

the 1970s and early 1980s is much smaller.m

Methodology

The most important assumption made in I-O

analysis is that of “linear,” or fixed, economies of

scale. Calculations that estimate the energy directly

and directly associated with a product assume that

the same mix of inputs, the process employed, and

the relative prices of goods and services are the same

for making one product as they are for making

10,000. Many of the calculations used in this

analysis such as the energy associated with manufactured v. service products, the primary energy

intensities associated with a product, and the energy

associated with household v. government expenditures rely on this assumption.

Another methodological assumption made in this

analysis was that all imported products could be

made in the United States and that the U.S.

production recipe for making these imported products is an exact proxy of the recipe used overseas.

Some products like coffee or chrome, cannot be

made in this country. Other products, like cars, that

do have a domestic counterpart are made much

differently overseas than in the United States. Thus,

estimates of the energy embedded in imported

products are rough approximations.

The production recipe only includes nondurable

inputs, such as steel and rubber, that are completely

used up in the production of output. Inputs of a more

durable nature that depreciate over time, such as

machine tools or the actual physical plant (capital

goods), are not included in the production recipe, but

are instead thought of as business investment and are

included in final demand.203 This assumption results

in an underestimate of the indirect energy associated

with a product if the complete demand vector,

including all of business investment, is not part of

the calculation. For example, the indirect energy

associated with making a car would not include the

energy required to make the stamping presses or the

conveyor belt. (Nevertheless, the nondurable input

of electricity needed to drive this equipment would

be included.) This assumption would affect estimates of the energy embodied in manufactured

products, the individual energy intensities, and the

energy associated with household expenditures.

This failure to include capital in the production

recipe results in an underestimate of the energy

embodied in products that ranges from 2 to 17

percent depending on the product. The unweighed

average underestimate is estimated to be 9 percent. 204

Lastly, the OTA model was constructed primarily

to address the question of how much of the change

in energy use was due to efficiency gains and how

much was due to a changing mix in the industrial

composition of output. To make this comparison, it

is important that the value of output be converted to

a constant set of prices since a million dollars’ worth

of output in 1963 had a much different value that a

million dollars’ worth of output in 1985. This

requires that price, an important factor in energy use,

beheld constant by creating a constant-dollar model.

In this sense, the model can isolate the change due

to efficiency but not why that efficiency change

occurred. Examples of likely causes of the change

are frequently cited in the analysis, but their

inclusion is anecdotal, not conclusive.

ENDNOTES FOR PART V
64 ● Energy Use and the U.S. Economy
Part V--Appendix .65