Introduction
Energy sector plays a pivotal role in a country’s economy because it runs all other sectors of the economy. According to Sørensen (2004, p. 23), oil provides more than one third of the total energy consumed in the world every day. This clearly indicates that oil is the major driver of the world’s economy.
Of course, there are other renewable sources of energy such as the hydropower, geothermal power, wind energy, and bio-fuel. However, they play a minimal role in the running of a country’s economy.
There has been a consistent increase in the price of a barrel of oil in the world market over the last fifty years (Langwith 2009, p. 34). It is a common phenomenon to see an increase in inflation within an economy whenever there is a rise in the cost of oil.
This is so because every industry is affected directly by such increase. The dealers are forced to pass the burden to the consumers which result in a systematic inflation in an economy. There has been an attempt by players in the energy sector to find solutions in the renewable energy sector.
This paper seeks to investigate the economic factors of renewable energy development (Bridgewater & Bridgewater 2009, p. 70).
Relations between Oil Price and Economic Growth
The world is currently over relying on oil as the main source of energy to run the economy. According to Lund (2010, p. 45), this is raising a lot of concern because oil is a non-renewable source of energy. The research by Da (2013, p. 47) shows that there is a direct relationship between oil prices and economic growth.
Oil is needed in every industry to energize the normal operational processes. From transport to machineries in major companies, oil is the main source of energy. Economic growth within a country can be achieved when there are cheap factors of production (Hazen 1996, p. 51).
This will help ensure that products are delivered to the market at fair prices. When the price of oil increases, then it means that companies’ ability to afford this important source of energy will be reduced.
According to Linscott (2011, p. 55), the price of a barrel was $ 20, but this has increased to five folds. This will force the manufactures to pass this increased cost to the consumers which results into an increase of consumer price index. The wage bill may rise as workers will demand for higher pays in order to manage the inflation.
Given that in most cases consumers do not have counter measures to cushion them from the increased prices, they will be forced to reduce the consumption of some products, or simply eliminate them in their budget. This will reduce profitability of many firms within the economy (Maczulak 2010, p. 65).
According to (Todaro & Smith 2009, p. 55), reduced income and profitability of individual firms will in turn result into reduced employment rates. The national government may even be forced to lay off some employees because its main source of income through taxation will be reduced.
This will slow the growth of a country’s Gross Domestic Product. According to Chiras (2011, p. 67), the stagnating economic growth of the United States since 2008 is closely related to the cost of oil that has sky-rocketed.
Economics of Energy Sector
According to Pimentel (2008, p. 86), in order to understand the economics of the energy sector, one must appreciate the fact that this sector dictates all other sectors of the economy.
After the Great Depression, the United States has experienced a massive economic growth because of the access to sources of energy (Mason & Mor 2009, p. 76). During this time, the United States was the largest producer of oil. It was also leading in the production of renewable energy in the world.
However, this is no longer the case because the country has been displaced to the third position after Saudi Arabia and Russia. However, it has remained the largest consumer of oil, consuming about 25% of the oil consumed in the world on a daily basis (Freris & Infield 2008, p. 95).
This comes at a cost. Countries that have rich sources of oil have experienced a positive growth over the years. Saudi Arabia, currently the world’s leading producer of oil, has been experiencing a massive economic growth over the last one decade.
According to the research by Craddock (2008, p. 76), for every one percent of oil that is consumed within an economy, there is always an increase of the GPP by 2%. In order to consume a given percentage of oil, a country must be able to produce it or buy the same at a reasonable cost.
Saudi Arabia, though considered a developing economy is the Middle East, has its GDP increasing at attractive rates (Black & Flarend 2010, p. 87). This is attributed to the fact that they have the capacity to produce oil that is beyond the national consumption.
They can easily sell the product in the world market. The increase in GDP increases the rate of employment within a country (Saunders & Chapman 2006, p. 63).
The economy will be running at its maximum, which means that many people will be needed to take part in various sectors of the economy.
The reverse is true for a country that is struggling to get oil. In this economic cycle, availability of oil leads to the growth of a country’s economy which, leads to employment opportunities and reduction of inflation.
When energy becomes scarce, the vicious circle of slow GDP growth, unemployment, and inflation begins. The United States, and other European nations such as France and the United Kingdom, is seriously considering the use of renewable energy instead of oil (Kemp 2006, p. 75).
Economic Context of Renewable Energy
The field of renewable energy has become very popular in the recent past. According to Kalogirou (2006, p. 66), although oil still remains the most important source of energy, it has devastating effects on the environment.
Chambers (2004, p. 77) says that the increasing prices of oil is bringing a global crisis as the world fights for the limited oil available in the market. Renewable sources of energy have been considered as a solution to this problem.
Renewable energy has not been given much attention because of its limited use and the process of harnessing it. It requires advanced technology to have planes or cars running on renewable energy. Sometimes the cost of harnessing renewable energy can be higher than using oil.
However, advancement in technology is bringing in the solution to this problem. Currently, it is cheaper and more efficient to run trains using electric energy than using fossil fuel (Moselle, Padilla & Schmalensee 2010, p. 48). This is the trend that should be reflected in other transport sector, especially the road transport.
Job Creation
Renewable energy can be an important source of employment. Bio-fuel is a clean source of energy that may offer employment among the youth (Zobaa & Bansal 2011, p. 62).This will not only reduce the demand for oil, but also create jobs, especially among the young generation.
Microeconomic and Macroeconomics
According to Wengenmayr and BĂĽhrke (2013, p. 59), this effort to produce energy at domestic levels would translate into overall reduction in the demand for oil in the entire economy.
The national government should also double its effort in production of other renewable sources of energy, especially the hydropower, geothermal power, and wind energy.
The micro and macroeconomic approach to finding solutions in the renewable energy sector can be beneficial to countries such as France and the United States that have limited sources of oil (Abbasi & Abbasi 2008, p. 61).
Data Analysis
According to Korkin, Krstić and Wells (2010, p. 85), the economy of a country will grow at a percentage of the energy it consumes within a specific period. The consumption of energy is a direct reflection of the economic activities taking place within the country.
On average, 1% of bump oil that is consumed in the world leads to 2% increase in the global GDP. This means that for the United States or France to experience an impressive 10% increase in GDP, it will need to experience 5% bump, in oil consumption (Andexer 2008, p. 77).
However, this is not an easy task in a world where a barrel of oil currently costs $ 100. This explains why since 2008, many European nations and the United States have not been able to experience more than 4% growth in their GDP (Fuchs & Masoum 2011, p. 87).
Demand and Supply of Fossil Fuel Energy
The basic law of economics that defines the cost of a product is based on the demand and supply (Mallon 2005, p. 89). When the demand of a product exceeds its supply, the cost of such a product shoots.
This is what has happened in the oil market. There has been an increasing demand for fossil fuel energy in the world market for the last fifty years (Gipe & Gipe 2003, p. 84).
Demand and Supply of Renewable
When the demand for a product is lower than the supply, its price will fall. Renewable energy is yet to be considered an appropriate alternative source of energy (Mukherjee &Chakrabarti 2004, p. 63).
Very few cars in France, United Kingdom, and many other developed nations use renewable energy. This low demand and low cost of the renewable energy has led to slow growth in this field (Zang 2011, p. 87).
Conclusion
The energy sector plays a pivotal role in the growth of a country’s economy. The cost of fossil fuel energy, which is the most common source of energy in all sectors of the economy, has been increasing over the years due to increase in its demand.
Development of renewable energy is the only solution to having cheap and clean sources of energy. However, most of the current machines and equipment, especially in the transport sector, still favour the use of fossil fuel energy.
The government and individual stakeholders need to understand the economic benefits of renewable energy development. For those countries that have limited oil deposits, the only solution to stimulating a country’s economic growth is to embrace renewable energy.
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