Long Run Trends in the Price of Energy and Energy Services

Abstract

Energy prices have risen considerably since the beginning of the twenty-first century. It is valuable to place these price rises within a historical context. Many peaks preceded the price hike of 2008, and there will, no doubt, be many more. However, if future trends follow past ones, then it is tempting to conclude that the long run trend in individual and average energy prices will be generally stable or downward. This policy briefing also highlights the tendency for long run trends in the price of energy and of energy services to diverge. That is, since the Industrial Revolution, energy efficiency improvements have led the price of energy services to fall far more than the decline in the price of energy. This is an important distinction because commentators have a tendency to focus on energy prices, even though consumers are ultimately interested in the services that energy provide. This divergence in the long run has major implications for forecasts of future energy use and carbon dioxide emissions, welfar improvements and the evolution of economies.