4.1.2 Alternative Futures Scenarios At a time when petroleum energy prices have increased nearly tenfold in a decade, and analysts have difficulty understanding events that have already occurred, the notion of making energy/economic forecasts well into the 21st century seems foolhardy. Given the long-range perspective of the SPS (i.e., not available until year 2000), a 50-year horizon for evaluating alternative major energy technologies (such as the SPS) is necessary. The key problem is how to reduce the vast number of possible "alternative futures" to a few meaningful alternatives that encompass the range of significant policy variables and unknowns without simply creating confusion. The solution is to focus attention mainly on the factors that may cause energy prices and demands to vary under a given set of economic-demographic assumptions. The underlying economic analysis — a major research effort in itself — was borrowed from the work of Ridker and Watson.30 Most energy/economic analyses begin with some model of the relationship between energy consumption and GNP. The simplest model, found mainly in pre-1973 studies, was based on the observation that GNP and energy demand, E, have tended to move closely in tandem in the U.S. for several decades. A simple E/GNP ratio was sometimes assumed. Deeper study of the data revealed a long-term declining trend in this ratio (see Fig. 4.1). This can be interpreted as a result of the economy's shift from energy-intensive primary agriculture and materials and manufacturing industries toward services, which add greatly to the GNP without consuming much energy. Until 1973, energy prices were declining, on the average, so that demand for energy presumably would have increased if it were not for the structural changes in the economy mentioned above. After 1973, of course, energy prices rose very sharply. The expected response in a market economy is a further decrease in demand, together with increased supplies. The balancing mechanism is illustrated schematically in Fig. 4.2. A number of medium- and long-term energy/economic models have an optimizing scheme (usually some mathematical programming algorithm) to project future energy costs for specified levels of demand. This procedure is classified as partial equilibrium insofar as the reverse feedback, i.e., the dependence of GNP on energy prices, is neglected. Examples include the ETA Model,31 the Nordhaus Model,32 the Brookhaven BESOM Model,33 and a dynamic version known as DESOM.34 All of these models assume that energy prices are bounded by the long-term marginal costs of supply. The independence of GNP and energy-influenced price changes can be a convenient, although rough, approximation if the energy sector is very small (4%) compared to the rest of the GNP. The ETA-MACRO35 model is another kind of general equilibrium model with a more detailed energy sector driven by an aggregated macroeconomic model, which includes a link between economic growth and investment. There are several dynamic, multisector, general equilibrium models in the literature, including Hudson-Jorgenson,3$ PIES,32 and Gulf-SRI,3$ but they are all necessarily very complex and consequently difficult to use and to explicate.
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