Energy Demand Modeling

From the end of World War II until the early 1970s there was a strong and steady increase in the demand for energy. The abundant supplies of fossil and other fuels from domestic and imported sources were sufficient to lead to an actual fall in the real price of energy of about 30 percent over a twenty-five-year period. The cheap and readily available energy supplies, particularly fossil fuels, led to industrial development in the western world of economies dependent upon these inputs. Energy was typically considered to be an intermediate good with fixed requirements to output. This is seen dramatically in plots of GNP versus energy use which are remarkably close to straight lines. Production function estimation would consider capital and labor to be the crucial inputs with energy’s availability taken essentially as unlimited with its total use and cost multiples of final output. The dramatic 500 percent increase in oil prices ($2.20 to $11.50 per barrel) in 1973–1974 led to a reassessment of this approach. Oil based products and related fossil fuels such as natural gas were no longer cheaper nor did they seem to be as readily available. The period 1972–1977 witnessed a 37 percent increase in the real cost of energy. With this rise in energy prices, the projections of demand growth quickly declined. The 1973 projection for energy demand in Canada for 1975–1990 was about 5.8 percent per year reflecting past trends.