ABSTRACT
Introduction Economics is about exchanges of all sorts, about the use and movement of resources in a process in which the object is to create wealth-or at the very least not permanently to destroy the means of creating wealth. Energy is a key resource: and the principal sources of energy for industrial societies are fossil fuels. These are being consumed far faster than they are being replaced, so that to all intents and purposes, in the process of creating wealth now, society is indeed permanently destroying the means of creating wealth in the future. Fossil fuels are a scarce resource; and the energy ‘crisis’ came about because OPEC perceived an impending scarcity of oil in the economic sense of the word, that is to say, the lack of a commodity in relation to demand for it. Economists distinguish between free goods such as sunshine, air and water which are normally so abundant that they have no price, and economic goods which bear a price because they are scarce in relation to demand. Every society has therefore to decide how best to allocate scarce productive resources: and when all productive resources are fully employed, an increase in the output of one commodity or service can be achieved only by reducing the output of another. The classical corrective action for actual or impending scarcity is to increase the price to the point where demand will not exceed supply so that at that price all demands are satisfied without recourse to administrative rationing. At the same time the search is intensified for additional sources of supply, and users seek to increase the yield from the scarce resource. This is precisely what is happening now with energy, and the questions that are addressed in this paper on economic evaluation in project appraisal are how to achieve a proper allocation of fuels, and how to increase the yields of useful goods and services from a given quantity of fuel. There is however no a priori assumption that energy-efficient processes are in some sense meritorious simply because they are energy-efficient. The situation may arise later in which mankind will have to adapt to consuming not goods and services that are freely chosen but only those that can be produced in the most energy-efficient way. For the present, market economics means that prices are the mechanism for balancing supply and demand of particular commodities and services; and if one person chooses to drive a large gasguzzling car at high speeds at considerable expense to himself it may be assumed that that person values fast and comfortable travel more highly than another who prefers to sit at home burning coal in an open fire while wearing an overcoat with the windows wide open in the middle of winter. This implies that the best allocation of resources in a free market economy is achieved when all individuals act independently and treat each transaction on its merits as perceived by themselves. Yet even in a free market economy unlimited supplies of a commodity are not available at all times in all places at one price, as any motorist knows.
