Rising energy prices in the U.S. reduce states' economic output, but they also prompt investments in more efficient equipment and technologies that partially offset those output losses over time, according to a new study by researchers at Penn State.
"At a time when rising energy prices are a top concern for policymakers, businesses and households, our study highlights the dual nature of energy price shocks," said Minsu Kim, a postdoctoral researcher at the Northeast Regional Center for Rural Development (NERCRD) in Penn State's College of Agricultural Sciences, who led the study. "While such shocks impose real economic costs in the short run, they also spur technological and structural changes that improve productivity and reduce energy dependence, helping economies become more resilient over the long term."
The study, published in Energy Economics, draws on the economic theory of induced innovation, which holds that when the price of an input rises, firms focus investments on using less of that input. In this case, the idea is that as energy prices increase, companies develop innovative solutions to compensate for the extra cost—either by developing alternative processes or new technologies.
