Tuesday, May 5, 2009

Ayres Warr Model

A friend of mine has written an article on "Some Implications of the Ayres Warr Model". He builds on the Ayres Warr model and puts all the terms of energy, efficiency, economic production output, labor, energy supply and energy prices into a new relationship. The advantage of his model is that it is a mathematical formula that one can play with to derive real numbers. The disadvantage is that the model needs further validation with historic data to increase the level of confidence in the model. I see that this model can be useful in predicting tendencies. It is not intended to predict given prices on a given date. I also see that as a model is tells us how the oil prices should react to certain changes in supply, efficiency or economic production. It will not tell us how it will react. The model shows us what the value of energy is, but the true intrinsic value can be far off the price. In short we can have a bubble where the price is significantly above the intrinsic value. In this context the model can possible help us see and recognize bubbles.

Putting the price of energy or oil aside, it gives conclusions on how the economy would react to reduced production and it concludes that increasing energy efficiency is the best way for increasing economic output. Interestingly, better efficiency would also benefit the energy producers as energy prices would go up according to the model.

A summary of this long document was posted on The Oil Drum at http://www.theoildrum.com/node/5378. A long discussion with 100 comments can also be found there.

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