Energy prices have risen sharply over the past year, a trend that was exacerbated by the Russian invasion of Ukraine. Though energy prices are projected to decline by 11% in 2023, if that projection materializes, energy prices would still be 75% above their average over the past five years. These high prices have had severe human costs, including making food unaffordable due to rising transport costs, causing blackouts in factories resulting in loss of essential goods, and preventing children from studying due to lack of electricity.
Addressing the socioeconomic consequences of high energy prices requires knowing who is most harmed when energy prices rise. To get a better understanding of this issue, we exploit harmonized consumption data from 119 surveys spanning 72 countries. For each of these surveys, we calculate the share of total consumption spent on energy by decile of consumption, and plot this by the level of consumption.
Evidently, there is a lot of variety. This is in part because energy needs depend on the climate of the country, the price of energy, cultural norms, and due to variations in how energy consumption or overall consumption is measured across countries. Yet there is also a common pattern to detect. From the scatter plot, it is evident that people with very low or very high consumption levels are unlikely to spend a large fraction of their consumption on energy.
If we fit a local polynomial through the scatter plot, it appears that individuals with a daily consumption between $5 to $20 on expectation spend more than 11% of their consumption on energy, while the very poorest and very wealthiest in the world spend close to half as much. Broadly speaking,
This pattern means that in low- and middle-income countries, where nearly all households have consumption levels below $20 a day, rising energy prices will hit the wealthiest more than the poorest. In high-income countries, to the contrary, where few households have daily consumption levels less than $5, rising energy prices will hit the poorest the most.
A hierarchy of needs and opportunities can explain this pattern. The very poorest spend a large fraction of their resources on nutrition and often lack access to electricity and energy-based modes of transportation. Once nutritional needs are satisfied, households often spend much additional resources on such energy needs. Though households at the very top of the global distribution surely use the most energy—they have more cars, larger homes to heat, fly more, etc.—as a fraction of total consumption, the additional energy expenditure makes up a smaller and smaller part.
Another way to look at who is most impacted by rising energy prices is by abstracting from food consumption and looking at how much energy consumption makes up of total consumption after parsing out the share households spend on food. The food share of total consumption declines systematically with consumption levels. Whereas the poorest spend three-quarters of their budget on food, households with daily consumption levels of about $50 spend less than a quarter of their resources of food. We can use this pattern to calculate the share of energy consumption of total non-food consumption.
Doing so reveals that the share of energy consumption of non-food consumption is highest for the very poorest.Seen in this light, the very poorest also bear large costs of high energy prices, and high energy prices impact the poorest the most, regardless of the income level of the country.
Through the right set of policies, governments can help mitigate the impact of rising energy prices on poor and vulnerable households. The exact policy instruments will vary from country to country depending on the energy sources used, fiscal space, and more. There are also many lessons to draw from past energy crises. Some policy options include better targeting of existing energy subsidies to the poor and creating mechanisms to manage energy bill volatility. Common to many countries is that high energy prices can accelerate the transition to green energy sources.