Divergences in the Long Run Trends in the Price of Energy and of Energy Services

Abstract

This paper presents new evidence on the very long run trends in the price of energy and energy services, such as heat, power, transport and light. The paper has two purposes. First, it shows that, in general, there was an upward trend in average energy prices leading up to the Industrial Revolution and a decline afterwards, associated with the shift from traditional energy sources to fossil fuels. At the end of the nineteenth and early twentieth centuries, however, average energy prices did rise, reflecting (not rising resource scarcity but) greater value to consumers, as they shifted to energy sources that provided the desired services more efficiently. Second, the paper highlights the dangers of focussing on the price of energy, rather than the price of energy services, when considering the long run. The price of energy ignores the major technological improvements that have occurred and that benefit the consumer. This failure to focus on the services is likely to lead to incorrect estimates of consumer responsiveness to changes in price and income. This paper suggests that the inclusion of service prices and consumption variables would lead to more reliable models of long run energy demand and forecasts of carbon dioxide emissions.