What are the basic economics of the energy industry? How do companies make money? What are their costs?
The energy industry plays an important role in virtually all industries. Manufacturers use energy to produce their goods and services through the running of machinery, companies use energy to transport their goods to their final consumers, and every person uses energy in their everyday lives to heat their home, light their house, and use electronics. Every individual and company’s quality of living is affected when there are fluctuations in the prices of energy, whether it is oil, gas, or coal, making energy an essential good whose opportunity cost of losing it is very high.
Energy industry companies make money by charging for their services. When people use energy in their homes, for example, they are charged by how much energy they use from their energy providers. Because energy is such an important commodity in every household, an energy company’s services are always demanded. Energy companies produce revenue and profits almost always no matter the economic situation of the overall economy. Because of the energy companies constant presence in the economy these companies contribute jobs and growth that works independently from the government to help unemployment rates and in order to stimulate the economy thus further investments in the energy industry, making more money.
An energy company’s main expenses are the cost of fuel to run the plant, as well as additional expenses of paying employees and buying machinery. There is also a current issue of pollution that has affected the way in which energy companies operate and has affected the preferences of consumers. The idea of “green energy” is an important topic in the upcoming election according to Daniel Yergin, author of The Quest: Energy, Security and the Remaking of the Modern World. (Economist.com, 2011). The topic of cap and trade economics has come into play when discussing the energy industry and energy company’s role to reduce the amount of pollution in to the earth’s atmosphere as a result of energy. Burning fossil fuels, carbon-dioxide emission from cars, and many others contribute to pollution related to the energy industry. This has affected these companies by forcing them to reconsider the way in which they expect their energy to be used in order to create a more environmentally friendly outcome from their product. For example, energy companies are trying to find alternatives to using these harmful methods such as investing in wind and water, as well as the creation of electric cars. This advance in technology uses up time and money and contributes to a company’s costs.
The energy companies need to develop innovative ways in the production progress also in order to make sure the safety.
ReplyDeleteYou started with a great introduction and overview of the importance of energy to everyone on earth, and then transitioned into an example of revenues/costs that most people can relate to.
ReplyDeleteYou may want to research into companies within the energy industry and take a look at their annual financial statements. You mention that the predominant costs for the industry are the cost of resources and then payment to employees and buying machinery. These are all definitely true, but you should look a little deeper into a company's income statement to see what major expenses they are really facing. For example, Pepco Holding's 2011 income statement lists: fuel expenses, costs of operation & management (both of which you listed!), but in addition there are depreciation expenses, restructuring costs, litigation, impairment losses, and property taxes.