Energy intensity and energy supply

Producing goods and services requires the use of energy inputs, which tend to be scarce and often need to be imported. The shares of primary energy inputs in firms’ costs vary across industries; naturally they tend to be large in sectors that produce processed energy products (e.g. Petroleum and coal products industry) but they are also large in some heavy industry sectors such as Ferrous metals and Chemical, rubber and plastic products or Minerals industries High reliance on energy inputs in these sectors means that they are vulnerable to energy price hikes as well as external supply-related pressures (i.e. reduction of supply leading to an increase in prices), in particular in the case of energy-importing countries. Differences in sectoral energy dependence as well as country characteristics in terms of primary energy supply policy can thus be an important source of comparative advantage.

After an extensive research on available energy policy indictors we chose to measure the extent of energy supply using the International Energy Agency (IEA) total primary energy supply (TPES) statistic scaled by the value of GDP. The IEA TPES measures total energy supply from a number of energy sources as found in their natural state, accounting for their calorific content of various energy commodities and converting it into a common unit of account (tonnes of oil equivalent). It equals production plus imports minus exports minus international marine bunkers plus or minus stock changes. The TPES-GDP ratios are calculated by dividing each country’s annual TPES by each country’s annual GDP expressed in constant 2000 prices and converted to US dollars using PPP for the year 2000.

The definition of TPES statistic refers to energy supply but in fact the statistic unavoidably reflects also demand factors, for example, through inclusion of energy imports. In fact, the TPES-to-GDP ratio is one of the most commonly used measures of energy intensity of economies, used extensively by the IE A, World Bank and general energy economics literature. An additional caveat is that, the measure can reflect a host of environmental and energy price policies, where countries with stricter energy use regimes or better technologies can record relatively lower TPES ratios. In light of these caveats, the interpretation of results based on this measure of energy supply should be approached carefully. We propose to interpret TPES-to-GDP ratio not as a strict measure of country relative natural endowment in energy sources but rather as a measure of general availability or affordability of energy in a given exporting economy. The proposed interaction term measuring sectoral dependence on energy is the ratio of total energy costs to the value of output in the given sector calculated from the input-output data available in the version 7 of the GTAP database.

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