Cycles and Trend in Coal and Oil Prices in the (Very) Long Run: A Schumpeterian Approach*

1. Cycles and Trend in Coal and Oil Prices in the (Very) Long Run: A Schumpeterian Approach* by Harry Bloch, Curtin University David Sapsford, University of Liverpool *Financial support from the Australian Research Council is gratefully acknowledged. CRAE– Centre for Research in Applied Economics

2. Outline Data Charts Characterization Interpretation: Schumpeter’s vision Conclusions Implications for the future CRAE– Centre for Research in Applied Economics

3. Data Annual price indexes for coal and oil averaged across reporting countries Each deflated by index of manufacturing goods prices Coal series from 1650 to 2010 Oil series from 1859 to 2010 Source: See Harvey, Kellard and Madsen, REStat May 2010 (updated) CRAE– Centre for Research in Applied Economics

6. Characterisation Long-run upward trend in real coal price in 19th Century, but not before or since Real price is commodity price deflated by price of manufactures Long-run upward trend in oil price since 20th Century, but not before Continuation into 21st Century? CRAE– Centre for Research in Applied Economics

7. Table 1 – Annual rate of change of real coal and oil prices for various cycles and full period

8. Interpretation: Schumpeter’s Vision • Theory of Economic Development [1912 (1934)] • Circular flow • Static analysis of self-reproducing economy • Economic Development • Discontinuous change (innovation) • New products, new production processes, new markets, new forms of organisation • Implies structural change that provides basis for further development of the economy

9. Schumpeter’s Vision Applied to Energy Commodities • Innovation involves structural change • Shift from water and animal power to coal in 19th Century • Shift in transport fuel from (expensive) coal to (cheap) oil in 20th • Economic Development • Industrial revolution would have stalled without steam power • Globalisation would have stalled without cheap transport

10. Conclusions Find long-run upward trend in real energy prices only over certain periods Upward movement localised to 19th Century for coal and 20th Century (plus?) for oil CRAE– Centre for Research in Applied Economics

11. Predicting the Future • Sustainability of economic development • Will we run out of cheap energy? • Applying the lessons from coal to the case of oil

14. Predicting the Future • Will oil be displaced by another cheap energy source? • Schumpeter’s insight • Profit is the mother of innovation • Laissez faire optimism?

15. THANK YOU

16. Kondratieff cycles • Schumpeter’s Business Cycles (1939) • Long-wave price cycles • Prices rise in upswing • Prices fall in downgrade (even as output expands) • Cycles begin and end in “normal” conditions • Focus on finished consumer goods, but some recognition of primary products, particularly as “sensitive prices” with greater cyclical amplitude

17. Table 2 – Annual rate of change of real coal and oil prices over cycle phases