Saturday, December 08, 2007

CIBC Discovers Basic Economics

CIBC has discovered a basic principle of economics - lowering the price of something tends to increase demand. Okay that's a little harsh, but in their latest Economics and Strategy, they discuss the paradox of increased energy efficiency and its effect on overall demand:

The OPEC oil shocks spawned huge improvements in energy efficiency, particularly insofar as oil was concerned. But three decades later, we find that the net effect of all of those efficiency initiatives has been to increase the world’s appetite for crude. While oil per unit of GDP has fallen impressively in large energy-consuming economies like the United States, total oil consumption, and indeed, total energy consumption, continue to grow by leaps and bounds. The increase in energy usage has dwarfed the gains in economic efficiency. Hence, instead of tapping energy demand, what we observe is that improvements in energy efficiency
lead to ever and ever-greater levels of energy usage.

Since increased efficiency is merely another way of saying the price has fallen, the results of their study should not be surprising.

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